Skip to content

FRM Part II · FRM Exam Part II · Netting, Close-out and Related Aspects

A bank has two counterparties. Under a legally enforceable ISDA with netting, trades with A have values of +30 and -12 (USD million to the bank). B's trades are +18 and -20 under an ISDA whose netting is NOT enforceable in B's jurisdiction. Using the net exposure where netting is enforceable and gross positive exposure where not, what is the bank's total current exposure to A and B?

For A, netting applies: 30 minus 12 equals 18 million. For B, netting is unenforceable, so only the positive 18 million trade counts. The total exposure is 36 million. Gross counting of both counterparties would give 48 million, overstating A's exposure.

  1. AUSD 36 millionCorrect
  2. BUSD 16 million
  3. CUSD 48 million
  4. DUSD 18 million

Explanation

A: 30 - 12 = 18 with netting. B: no netting, so only the positive value counts: 18. Total = 18 + 18 = 36. Netting B as well would give 16 (18 - 20 is negative, floored at zero, giving 18 total, not 16 — misapplied). Gross for both gives 48.

Did you get it right without looking?

One question tells you little. A timed set on Netting, Close-out and Related Aspects shows your real accuracy, how long you take and where you lose marks.

Practise Netting, Close-out and Related AspectsFree diagnostic mock

More Netting, Close-out and Related Aspects questions