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FRM Part II · FRM Exam Part II · The Evolution of Stress Testing Counterparty Exposures

A credit officer compares PFE and EPE for a counterparty. Which statement is most accurate about how these metrics are used?

PFE is a high-percentile worst-case style exposure used mainly for credit limits, whereas EPE is an average of expected exposure over time used for pricing credit valuation adjustment and regulatory capital. They measure different parts of the exposure distribution and are not interchangeable.

  1. AEPE is a high-quantile measure used to set credit limits, while PFE is used for CVA pricing
  2. BPFE is a high-quantile measure typically used for limit setting, while EPE is an average exposure used in the pricing of CVA and in regulatory capitalCorrect
  3. CPFE and EPE are identical when exposures are normally distributed with any mean
  4. DEPE is the maximum exposure over the life, while PFE is the average of positive exposures

Explanation

PFE is a conservative quantile (e.g. 95% or 99%) of exposure, suited to limit management. EPE averages exposure over time and is the basis for expected loss, CVA and capital calculations. The other options swap or conflate the roles.

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