Skip to content

FRM Part II · FRM Exam Part II · Credit Value Adjustment

A bank nets two trades with one counterparty under an enforceable netting agreement. Trade A has a current value of +30 million and Trade B has a current value of -18 million. Without netting, current exposure is 30 million. Which statement about current exposure is correct?

Current exposure with netting is 12 million. Under an enforceable netting agreement the trades are aggregated into a single net value of 30 minus 18, and exposure is the positive part of that net value, so netting reduces current exposure.

  1. AWith netting it is 12 million, because exposure is computed on the net portfolio valueCorrect
  2. BWith netting it is 48 million, because gross values are added
  3. CWith netting it is 18 million, because the larger negative value is retained
  4. DWith netting it is 30 million, because netting only affects future exposure

Explanation

With enforceable netting, exposure is max(30-18,0) = 12 million. Adding absolute values gives 48, which is wrong. Netting reduces current exposure as well as future exposure.

Did you get it right without looking?

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

Practise Credit Value AdjustmentFree diagnostic mock

More Credit Value Adjustment questions