FRM Part II · FRM Exam Part II · Counterparty Risk and Beyond
A bank has four OTC swaps with one counterparty with mark-to-market values of +40, -25, +30 and -10 (USD millions). All are in the same legally enforceable netting set. If the trades are bilaterally uncleared and no collateral is held, what is the reduction in current exposure from netting compared with no netting?
Gross exposure without netting is 70 million (40 + 30). With netting, the net value is 35 million (40 - 25 + 30 - 10). The reduction is therefore 35 million, because negative-value trades offset positive ones inside an enforceable netting set.
- AUSD 25 million
- BUSD 35 millionCorrect
- CUSD 70 million
- DUSD 0 million
Explanation
Without netting, exposure is the sum of positive values: 40 + 30 = 70. With netting, exposure is max(40 - 25 + 30 - 10, 0) = 35. The reduction is 70 - 35 = 35. Choosing 70 reports the gross exposure, not the reduction.
Did you get it right without looking?
One question tells you little. A timed set on Counterparty Risk and Beyond shows your real accuracy, how long you take and where you lose marks.
More Counterparty Risk and Beyond questions
- A bank and a counterparty trade under a CSA with a USD 2 million threshold for the counterparty, and a minimum transfer amount of USD 0.5 mi…
- A bank has a swap with a counterparty. Its expected positive exposure profile is flat at USD 10 million, the counterparty's expected negativ…
- A bank and a counterparty have a netting set with a current mark-to-market of +30 million to the bank. The credit support annex has a thresh…
- A bank has an uncollateralised derivative portfolio with a corporate counterparty. Under the standard unilateral CVA framework, which expres…
- A bank's desk computes a unilateral CVA of 2.0 million and a DVA of 0.5 million on a netting set. Funding costs on uncollateralised exposure…
- A bank has a large uncollateralised swap book with an energy producer whose default probability tends to rise when oil prices fall, and the …