FRM Part I · FRM Exam Part I · Introduction to Derivatives
A dealer has three OTC positions with one counterparty. Under a legally enforceable bilateral netting agreement the mark-to-market values to the dealer are +USD 18 million, -USD 11 million and +USD 4 million. The counterparty defaults. Ignoring collateral, the dealer's loss compared with no netting is lower by how much, assuming losses equal positive net exposure under netting and sum of positive values without it?
Netting lowers the loss by USD 11 million. Without netting, the dealer is exposed to the positive positions of 18 plus 4, or USD 22 million. With netting the exposure is the net 11 million, so the benefit equals the offset negative position.
- AUSD 4 million
- BUSD 11 millionCorrect
- CUSD 22 million
- DUSD 7 million
Explanation
Without netting, exposure = 18 + 4 = 22 million, as the negative position must still be paid. With netting, exposure = 18 - 11 + 4 = 11 million. The reduction is 22 - 11 = 11 million.
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