Skip to content

FRM Part II · FRM Exam Part II · Derivatives

A bank has a USD 100 million EAD to a corporate derivative counterparty with a risk weight of 50% under the standardised approach. Capital is held at 8% of risk-weighted assets. The bank obtains a collateral-like netting benefit that reduces the EAD by 30%. What is the reduction in minimum capital requirement resulting from the EAD reduction?

The EAD falls by USD 30 million, which at a 50% risk weight cuts risk-weighted assets by USD 15 million. At an 8% capital ratio, that lowers required capital by USD 1.2 million, equal to the difference between 4.0 million before and 2.8 million after.

  1. AUSD 1.2 million
  2. BUSD 2.4 millionCorrect
  3. CUSD 4.0 million
  4. DUSD 12.0 million

Explanation

EAD falls by 30 million. RWA reduction = 30 x 50% = 15 million. Capital reduction = 15 x 8% = USD 1.2 million. Check: original capital 100 x 0.5 x 0.08 = 4.0; new capital 70 x 0.04 = 2.8; difference 1.2. So the correct option is the 1.2 figure.

Did you get it right without looking?

One question tells you little. A timed set on Derivatives shows your real accuracy, how long you take and where you lose marks.

Practise DerivativesFree diagnostic mock

More Derivatives questions