FRM Part II · FRM Exam Part II · Netting, Close-out and Related Aspects
A bank has two netting sets with one counterparty, each under a separate enforceable agreement. Set 1 has net value +30 million and set 2 has net value -18 million to the bank. No collateral is held. What is the bank's current exposure?
The exposure is 30 million. Netting only operates within each legally enforceable netting set, so the 30 million positive set counts in full and the negative 18 million set contributes zero. Offsetting across separate agreements to get 12 million is not permitted.
- A30 millionCorrect
- B12 million
- C18 million
- D48 million
Explanation
Netting applies only within each agreement. Set 1 exposure is max(30,0) = 30 and set 2 is max(-18,0) = 0, so total is 30 million. Offsetting across sets (giving 12 million) is wrong since no cross-agreement netting exists.
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.
More Netting, Close-out and Related Aspects questions
- A bank's netting opinion for Country X covers banks incorporated there but has no coverage for branches of foreign firms. The bank trades wi…
- Under a legally enforceable netting agreement, Bank A has four trades with a defaulting counterparty, valued at close-out as +USD 18 million…
- A risk manager is deciding whether a bank can recognise netting benefits for exposures to a counterparty in a new jurisdiction. Which condit…
- A risk manager reviews a CSA under which cash collateral is posted daily, but the margin period of risk (MPOR) used for the counterparty exp…
- Bank X has two netting sets with a defaulting counterparty. Set 1 (enforceable netting) has trade values of +80, -50 and +30 (USD million). …
- 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…