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FRM Part II · FRM Exam Part II · Credit Risk Management

A bank has a single uncollateralized interest rate swap with a corporate client. The swap currently has a negative mark-to-market value to the bank of USD 3 million, and the simulated distribution of its future value shows a positive tail at the 97.5th percentile of USD 5 million. What is the bank's current exposure to the client?

Current exposure is zero. It equals the maximum of the contract's mark-to-market value and zero. Because the swap is worth negative USD 3 million to the bank, the bank would owe the client rather than be owed, so a default would not cause a credit loss on this trade.

  1. AUSD 0Correct
  2. BUSD 3 million
  3. CUSD 5 million
  4. DUSD 2 million

Explanation

Current exposure is the greater of the current mark-to-market value and zero, because the bank loses nothing on default if it owes money to the client. With a value of -USD 3 million, the exposure is zero. The USD 5 million is a potential future exposure, not current exposure, and USD 3 million wrongly takes the absolute value.

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