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

A bank's counterparty credit risk team computes the exposure profile for a portfolio of uncollateralised OTC derivatives with a single counterparty. Which of the following correctly defines Potential Future Exposure (PFE) at a 97.5% confidence level for a given future date?

PFE at 97.5% confidence is the 97.5th percentile of the exposure distribution at a given future date. It is a quantile measure used for limits. Expected exposure is the mean of positive exposures, and the tail average describes expected shortfall instead.

  1. AThe average of all positive exposures across simulated scenarios at that date
  2. BThe 97.5th percentile of the distribution of exposure at that future dateCorrect
  3. CThe maximum of the expected exposure over the life of the portfolio
  4. DThe average of the worst 2.5% of exposure outcomes at that date

Explanation

PFE is a high quantile of the exposure distribution at a given future date, so 97.5% PFE is the 97.5th percentile. The average of all positive exposures is expected exposure (EE). The average of the worst 2.5% is an expected-shortfall-type measure, not PFE.

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