FRM Part II · FRM Exam Part II · Counterparty Risk and Beyond
A bank has two trades with the same counterparty under an 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. Without netting, exposure is the sum of positive values. What is the reduction in current exposure due to netting?
Netting reduces current exposure by USD 5 million. Gross exposure is USD 12 million because only the positive trade counts. Under netting the two values offset to USD 7 million, so the reduction is 12 minus 7, equal to the size of the negative trade.
- AUSD 5 millionCorrect
- BUSD 7 million
- CUSD 12 million
- DUSD 0
Explanation
Without netting, exposure = max(12,0)+max(-5,0) = 12 million. With netting, exposure = max(12-5,0) = 7 million. The reduction is 12 - 7 = 5 million. The answer of 7 million is the netted exposure, not the reduction.
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