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

A bank holds a portfolio with a counterparty under a netting agreement. The portfolio's mark-to-market is +20 million. The credit support annex requires the counterparty to post variation margin daily, with a threshold of 6 million and a minimum transfer amount of zero. Ignoring independent amount and assuming collateral is posted exactly as required, what is the bank's uncollateralised exposure immediately after the call is settled?

The residual exposure is 6 million. With a 6 million threshold, the counterparty posts only the excess of the 20 million mark-to-market over the threshold, which is 14 million. The bank therefore remains uncollateralised by exactly the threshold amount.

  1. A6 millionCorrect
  2. B14 million
  3. C20 million
  4. D0

Explanation

Collateral required equals exposure above the threshold: 20 - 6 = 14 million. After receipt, the remaining exposure is 20 - 14 = 6 million, which equals the threshold. 14 million is the collateral amount, not the residual exposure.

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