FRM Part II · FRM Exam Part II · Credit Value Adjustment
A bank has two trades with the same counterparty under a legally enforceable netting agreement. Trade A has a mark-to-market of +USD 12 million and Trade B has a mark-to-market of -USD 5 million. Compared with no netting, how does the current exposure change?
Current exposure falls from USD 12 million to USD 7 million. Without netting, only the positive trade counts, giving 12 million. With enforceable netting the values are offset, so exposure is the maximum of 12 minus 5 and zero, which is 7 million.
- AFalls from USD 12 million to USD 7 millionCorrect
- BFalls from USD 7 million to USD 5 million
- CRises from USD 7 million to USD 12 million
- DStays at USD 12 million
Explanation
Without netting, exposure is max(12,0)+max(-5,0) = 12. With netting, exposure is max(12-5,0) = 7. Netting therefore reduces exposure by 5 million, the value of the negative trade.
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