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FRM Part II · FRM Exam Part II · Netting, Close-out and Related Aspects

A bank trades three derivatives with a counterparty under a legally enforceable netting agreement. The trades have current mark-to-market values of +40 million, +25 million and -50 million to the bank. Ignoring collateral, what is the bank's current credit exposure to the counterparty?

The exposure is 15 million. Under an enforceable netting agreement the trade values are added together (40 + 25 - 50 = 15), and the positive net amount is the exposure. The figure of 65 million would apply only if there were no netting.

  1. A65 million
  2. B15 millionCorrect
  3. C40 million
  4. D50 million

Explanation

With enforceable netting, values are summed: 40 + 25 - 50 = 15 million, and exposure is max(15, 0) = 15 million. Without netting it would be 65 million, the sum of positive values only, which ignores the offset.

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