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

A bank simulates the mark-to-market of a swap with a counterparty at three future dates with equal time spacing. Expected exposure (EE) at the dates is USD 4 million, USD 10 million and USD 6 million. Time intervals are equal (1 year each, total 3 years). Using a simple time-weighted average of the three EE values (equal weights), what is the expected positive exposure (EPE), and what is the peak EE?

EPE is the average of the expected exposures, (4 + 10 + 6) / 3 = USD 6.67 million. Peak EE is the highest EE over the horizon, USD 10 million. Summing the values would wrongly give 20 million.

  1. AEPE USD 6.67 million; peak EE USD 10 millionCorrect
  2. BEPE USD 10 million; peak EE USD 6.67 million
  3. CEPE USD 6.67 million; peak EE USD 6 million
  4. DEPE USD 20 million; peak EE USD 10 million

Explanation

EPE is the time-weighted average of EE: (4+10+6)/3 = 6.67 million. Peak EE is the maximum EE over the horizon, which is 10 million. Option 20 million sums rather than averages the values.

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