FRM Part II · FRM Exam Part II · Fundamentals of Credit Risk
A bank has two derivative trades with a counterparty under a legally enforceable close-out netting agreement. Trade A has a mark-to-market value of +USD 12 million to the bank and Trade B has a value of -USD 8 million. Ignoring collateral, what is the bank's credit exposure to the counterparty?
The exposure is USD 4 million. Under an enforceable close-out netting agreement the trades are offset into a single net amount, 12 minus 8. Without netting, the bank would be exposed to USD 12 million, the positive trade alone.
- AUSD 4 millionCorrect
- BUSD 8 million
- CUSD 12 million
- DUSD 20 million
Explanation
With enforceable close-out netting, positive and negative values are offset: 12 - 8 = USD 4 million. Without netting, the exposure would be USD 12 million, since only the positive trade counts. USD 20 million wrongly adds the absolute values.
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