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

A bank has two netting sets with a counterparty. Set 1 has trades valued at +30 and -10 (USD million). Set 2 has trades valued at +8 and -20 (USD million). Netting is enforceable within each set but not across sets. What is the current exposure, and how much netting benefit is there relative to no netting at all?

Exposure is USD 20 million and the netting benefit is USD 18 million. Set 1 nets to 20 and Set 2 nets to -12, floored at zero because there is no cross-set netting. Gross positive exposure is 38 million, so netting saves 18 million.

  1. AExposure 20; benefit 18Correct
  2. BExposure 8; benefit 30
  3. CExposure 20; benefit 10
  4. DExposure 38; benefit 0

Explanation

Set 1 net = 20, Set 2 net = -12 so exposure floors at 0. Total exposure = 20. Without netting, exposure = 30 + 8 = 38. Benefit = 38 - 20 = 18. Offsetting across sets (net 8) is not permitted.

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