Skip to content

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

A credit officer sets counterparty limits for a long-dated cross-currency swap portfolio. She argues that limits should be based on peak PFE rather than on EPE. Which statement best supports her choice?

Peak PFE is better for limits because it shows the highest high-confidence exposure at any future date, while EPE averages across time and can hide a short-lived spike. EPE is the capital-oriented measure, and PFE does reflect netting benefits.

  1. APeak PFE equals the capital charge under the internal model method
  2. BEPE overstates exposure because it includes only negative values
  3. CPeak PFE captures the worst high-confidence exposure at any future date, whereas EPE averages across time and can mask a short-lived spikeCorrect
  4. DPeak PFE is unaffected by netting agreements, making it more conservative

Explanation

Limits aim to control the largest plausible exposure at any point, which peak PFE captures. EPE averages over time, so a large exposure at one date can be diluted. EPE includes only positive exposures, not negative, and PFE is reduced by netting.

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