FRM Part II · FRM Exam Part II · Counterparty Risk and Beyond
A bank has three OTC derivative trades with a single counterparty under an enforceable master netting agreement. The trades have mark-to-market values to the bank of +USD 12 million, -USD 5 million and +USD 3 million. No collateral is held. What is the bank's current exposure to the counterparty after netting?
The current exposure is USD 10 million. With an enforceable master netting agreement, positive and negative trade values are added together (12 - 5 + 3), and the positive net result is the exposure. Summing only the positive trades gives USD 15 million, which ignores netting.
- AUSD 15 million
- BUSD 10 millionCorrect
- CUSD 20 million
- DUSD 12 million
Explanation
Under an enforceable netting agreement, values are summed: 12 - 5 + 3 = 10 million. The exposure is the positive net value, so USD 10 million. USD 15 million ignores netting and counts only positive trades.
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