Skip to content

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

A bank's counterparty credit risk team simulates the netted portfolio value with a particular counterparty over many future dates. At each date it takes the 97.5th percentile of the distribution of positive portfolio values. The highest of these values over the life of the portfolio is used to set a credit line. Which exposure measure is this?

This is peak potential future exposure. PFE takes a high percentile of the positive exposure distribution at each future date, and the maximum across dates gives the peak figure used for credit limits. Expected exposure measures averages rather than tail quantiles, so it does not fit.

  1. AExpected exposure
  2. BPeak (maximum) potential future exposureCorrect
  3. CEffective expected positive exposure
  4. DExpected positive exposure

Explanation

Potential future exposure is a high quantile of the exposure distribution at each date. The maximum of this profile over time is the peak PFE, commonly used for credit limits. Expected exposure uses the mean, not a high percentile.

Did you get it right without looking?

One question tells you little. A timed set on Future Value and Exposure shows your real accuracy, how long you take and where you lose marks.

Practise Future Value and ExposureFree diagnostic mock

More Future Value and Exposure questions