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FRM Part II · FRM Exam Part II · Future Value and Exposure

A bank has the following expected exposure profile to a counterparty over a 2-year horizon: EE is USD 4 million for year 1 (0 to 1) and USD 10 million for year 2 (1 to 2), with the profile constant within each year. What is the expected positive exposure (EPE) over the 2 years?

EPE is USD 7 million. Expected positive exposure is the time-weighted average of the expected exposure profile, so (4 million for one year plus 10 million for one year) divided by two years gives 7 million. Summing or taking the last value does not average over time.

  1. AUSD 10 million
  2. BUSD 14 million
  3. CUSD 7 millionCorrect
  4. DUSD 6 million

Explanation

EPE is the time-weighted average of EE over the horizon: (4×1 + 10×1)/2 = 7 million. Using 14 sums the exposures without averaging. Using 10 takes the final-year value, which is closer to a peak-type measure and not the average.

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