Skip to content

FRM Part II · FRM Exam Part II · Future Value and Exposure

A bank has two trades with a counterparty under a netting agreement. Trade 1 has an exposure at a future date that is normally distributed with mean 0 and standard deviation 10 (USD million). Trade 2 has an independent exposure with the same distribution. Using the result that for a normal variable with mean 0 and standard deviation s the expected positive part is s x 0.399, what is the ratio of the netted expected exposure to the sum of the standalone expected exposures (both to two decimals)?

The ratio is about 0.71. Each trade has expected exposure of 0.399 times 10, or 3.99, summing to 7.98. The netted portfolio has standard deviation of the square root of 200, or 14.14, giving expected exposure 5.64. Dividing 5.64 by 7.98 gives roughly 0.71.

  1. A0.50
  2. B0.71Correct
  3. C0.85
  4. D1.00

Explanation

Standalone EE each = 0.399 x 10 = 3.99, sum = 7.98. Netted portfolio is normal with mean 0 and sd sqrt(100+100)=14.14, so EE = 0.399 x 14.14 = 5.64. Ratio = 5.64/7.98 = 0.707, about 0.71. Ratio 1.00 assumes no netting benefit, and 0.50 wrongly assumes full offset.

Did you get it right without looking?

One question tells you little. A timed set on Future Value and Exposure shows your real accuracy, how long you take and where you lose marks.

Practise Future Value and ExposureFree diagnostic mock

More Future Value and Exposure questions