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FRM Part II · FRM Exam Part II · The Evolution of Stress Testing Counterparty Exposures

A bank holds USD 30 million of collateral against a counterparty, in the form of corporate bonds, under a one-way credit support annex. The portfolio mark-to-market to the bank is USD 50 million. In a stress scenario the portfolio value rises by USD 20 million, the bonds suffer a 25% price fall, and the counterparty defaults with no further margin received. What is the bank's stressed uncollateralised exposure after close-out?

The stressed exposure is USD 47.5 million. The portfolio rises to USD 70 million, while the USD 30 million of bonds fall 25% to USD 22.5 million, leaving USD 47.5 million uncovered.

  1. AUSD 40.0 million
  2. BUSD 47.5 million
  3. CUSD 62.5 millionCorrect
  4. DUSD 70.0 million

Explanation

Stressed portfolio value is 50+20=USD 70 million. Collateral value is 30x(1-0.25)=USD 22.5 million. Net exposure is 70-22.5=USD 47.5 million. Check the options: 47.5 is the option matching this figure, so the key is USD 47.5 million.

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