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

A bank's CVA desk simulates exposures using risk-neutral drifts and volatilities calibrated to market prices. The risk function wants to compute a PFE for limit setting and regulatory capital. Which statement is most appropriate?

Risk-neutral simulation, calibrated to market prices, is appropriate for pricing CVA, whereas PFE for limits and capital is a real-world measure and should typically use real-world drifts and historically estimated volatilities. The measure choice can materially change tail exposures.

  1. ARisk-neutral simulation is suitable for CVA pricing, but PFE for risk management should typically use real-world drifts and historically estimated volatilitiesCorrect
  2. BReal-world drifts must be used for CVA pricing and risk-neutral for PFE
  3. CThe same risk-neutral scenarios must be used for both because measure choice does not affect exposure
  4. DDrift is irrelevant to exposure, so only correlation matters

Explanation

Pricing CVA requires market-consistent (risk-neutral) valuation, whereas PFE is a statement about real-world outcomes, so it should use real-world drift and historical volatility. The choice of measure can materially change tail exposures, especially for long maturities, so the options asserting equivalence or reversal are wrong.

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