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FRM Part II · FRM Exam Part II · Counterparty Risk and Beyond

A bank wants a single exposure measure reflecting the average of expected exposure over the first year of a trade, to be used as the exposure input to a capital calculation. Which measure is this?

The measure is expected positive exposure (EPE), which is the time average of the expected exposure profile over the horizon, typically one year. It smooths exposure across dates, unlike peak exposure, which is a high quantile at one date, or current exposure, which is only today's value.

  1. AExpected positive exposure (EPE)Correct
  2. BPeak exposure at the 99th percentile
  3. CCurrent exposure
  4. DNegative expected exposure

Explanation

Expected positive exposure is the time-weighted average of the expected exposure profile over a given horizon, commonly one year for regulatory capital. Peak exposure is a high quantile at a single date, current exposure is today's replacement cost, and negative expected exposure concerns the bank's liabilities.

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