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

A bank stresses a single counterparty netting set. Unstressed, the netting set has a mark-to-market of 40 million, uncollateralised. In the stress scenario, the mark-to-market rises to 100 million. The bank holds 30 million of collateral, but the stress also causes a 20% haircut on this collateral's value and the counterparty defaults. Ignoring any threshold or independent amount, what is the stressed net exposure at default?

The stressed exposure is 76 million. The 30 million of collateral loses 20% of its value under stress, leaving 24 million, which is deducted from the 100 million stressed mark-to-market. Ignoring the haircut would wrongly give 70 million.

  1. A70 million
  2. B76 millionCorrect
  3. C60 million
  4. D30 million

Explanation

Collateral after haircut is 30 x (1 - 0.20) = 24 million. Exposure = 100 - 24 = 76 million. Ignoring the haircut gives 70 million. Treating the 60 as 100 minus 40 uses the unstressed mark wrongly, and 30 is the collateral amount alone.

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