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FRM Part II · FRM Exam Part II · Fundamental Review of the Trading Book

A bank has a trading book securitisation position with a notional of 50 million. The securitisation default risk charge under the standardised approach uses a jump-to-default style measure. The position is long, has a risk weight of 8% for default risk, and the bank also holds a short hedge of 10 million in the same tranche with the same risk weight. Ignoring any further netting or buckets, what is the capital for the net long exposure?

The capital is 3.2 million. The short 10 million hedge in the same tranche offsets the 50 million long, leaving a net 40 million exposure, and applying the 8% risk weight gives 3.2 million. Ignoring the hedge would overstate the charge at 4.0 million.

  1. A3.2 millionCorrect
  2. B4.0 million
  3. C0.8 million
  4. D4.8 million

Explanation

Net the long and short in the same tranche: 50 - 10 = 40 million. Apply the 8% risk weight: 40 x 0.08 = 3.2 million. The 4.0 million option applies the risk weight to the gross long exposure only, ignoring the hedge. The 0.8 million option charges only the hedge, and the 4.8 million option sums the long and the short.

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