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

A bank simulates the expected exposure (EE) profile of a swap portfolio over a 4-year horizon, with annual time points. EE at years 1, 2, 3 and 4 is USD 8 million, USD 12 million, USD 10 million and USD 6 million, respectively. Treating each year's EE as constant over the interval ending at that date with equal time weights, what is the Expected Positive Exposure (EPE) over the horizon?

EPE is the time-weighted average of expected exposure. With equal annual weights, (8+12+10+6)/4 equals USD 9 million. The USD 12 million figure is the peak EE, and USD 36 million is merely the unaveraged sum of the four EE values.

  1. AUSD 12.0 million
  2. BUSD 9.0 millionCorrect
  3. CUSD 36.0 million
  4. DUSD 10.0 million

Explanation

EPE is the time-weighted average of EE. With equal weights: (8 + 12 + 10 + 6) / 4 = 36 / 4 = USD 9 million. USD 12 million is the peak EE, and USD 36 million is the sum without averaging.

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