FRM Part II · FRM Exam Part II · Credit Value Adjustment
A bank has a single uncollateralised, non-netted derivative with a counterparty. The current mark-to-market value of the trade is -USD 4 million from the bank's perspective. If the counterparty defaults today and no recovery were possible on any amount owed to the bank, what is the bank's current credit exposure on this trade?
The current exposure is zero. Credit exposure equals the greater of the trade's value and zero, because a bank only loses if the counterparty owes it money. A negative mark-to-market of USD 4 million means the bank is the debtor, so it has no credit exposure.
- AUSD 4 million
- B-USD 4 million
- CUSD 0Correct
- DUSD 8 million
Explanation
Current exposure is max(V, 0). With V = -4 million, the bank owes the counterparty, so it has no claim and exposure is zero. Reporting 4 million ignores the floor at zero; -4 million ignores that exposure cannot be negative.
Did you get it right without looking?
One question tells you little. A timed set on Credit Value Adjustment shows your real accuracy, how long you take and where you lose marks.
More Credit Value Adjustment questions
- A dealer is comparing bilateral uncollateralised exposure with exposure under a two-way CSA with zero threshold. Which of the following best…
- A bank's credit spread widens sharply during a market stress period because investors perceive it as riskier, while the bank's derivative po…
- A bank calculates the fair value of an uncollateralized derivative portfolio with a corporate client. It then adjusts the risk-free value to…
- A bank has an interest rate swap in which it receives fixed from a counterparty. Assume the counterparty is the only defaultable party. How …
- A bank has an uncollateralised derivative portfolio with a corporate client. The bank calculates unilateral CVA from its own perspective. Wh…
- A bank has an uncollateralised OTC derivative portfolio with a counterparty. Under the standard unilateral CVA approach, which expression be…