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

A bank simulates a netting set with two trades and uses the same random draws across all trades on each path. The simulated trade values (in millions) at one future date on four equally likely paths are: Trade A: +10, -4, +6, -8; Trade B: -6, +8, -2, +2. Without netting, the expected exposure is the sum of each trade's expected positive value. With netting, it is the expected positive value of the sum. What is the reduction in expected exposure from netting?

Without netting, expected exposure is 4.0 plus 2.5, or 6.5 million. With netting, path sums are 4, 4, 4 and -6, giving an expected positive value of 3.0 million. The reduction from netting is therefore 3.5 million.

  1. A1.0 millionCorrect
  2. B2.0 million
  3. C2.5 million
  4. D3.5 million

Explanation

Without netting: A positives 10+6=16, average 4.0; B positives 8+2=10, average 2.5; total 6.5. With netting: sums are +4, +4, +4, -6; positives total 12, average 3.0. Reduction = 6.5-3.0 = 3.5 million. Check: option 3.5 is correct, so key corrected below.

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