FRM Part II · FRM Exam Part II · Derivatives
A bank has three OTC derivative trades with a counterparty under a legally enforceable close-out netting agreement. Trade mark-to-market values to the bank are +USD 12 million, -USD 5 million and +USD 3 million. No collateral is held. What is the bank's net credit exposure to the counterparty?
The net exposure is USD 10 million, because enforceable close-out netting allows positive and negative trade values to be summed (12 - 5 + 3). Summing only the positive values, USD 15 million, would be the gross exposure without netting.
- AUSD 10 millionCorrect
- BUSD 15 million
- CUSD 20 million
- DUSD 3 million
Explanation
Under enforceable close-out netting, the values are summed: 12 - 5 + 3 = 10 million. Without netting, exposure would be the sum of positive values, 15 million, which ignores the offset from the negative trade. Option USD 20 million adds absolute values.
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