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

A bank simulates the mark-to-market value of a forward contract with a counterparty at one future date using five equally likely scenarios: +8, +4, 0, -4 and -8 (USD million). There is no collateral or netting. What is the expected exposure (EE) at that date?

Expected exposure is the average of positive mark-to-market values across all scenarios. The positive values are 8 and 4, totalling 12, spread over five equally likely scenarios, giving USD 2.4 million. Negative values are floored at zero rather than offsetting.

  1. AUSD 0 million
  2. BUSD 2.4 millionCorrect
  3. CUSD 3.0 million
  4. DUSD 12.0 million

Explanation

Exposure is max(V,0): 8, 4, 0, 0, 0. Sum is 12, divided by 5 equally likely scenarios gives 2.4. Using the mean of the values gives 0, ignoring the floor at zero. Dividing 12 by 4 positive-or-zero scenarios gives 3.0, which is the wrong base.

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