FRM Part I · FRM Exam Part I · Central Clearing
A dealer has trades with a client in two netting sets, each under a separate legally enforceable netting agreement. Set 1 has values to the dealer of +USD 40 million and -USD 15 million. Set 2 has values of +USD 10 million and -USD 30 million. No collateral is held. If the client defaults, what is the dealer's total exposure?
Total exposure is USD 25 million. Netting is applied within each netting set: Set 1 nets to 25 million, and Set 2 nets to negative 20 million, which floors at zero. Because the sets are separate, the negative value in Set 2 cannot offset Set 1.
- AUSD 25 millionCorrect
- BUSD 5 million
- CUSD 50 million
- DUSD 35 million
Explanation
Netting applies within each set: Set 1 = max(40-15,0)=25; Set 2 = max(10-30,0)=0. Total = 25. Netting across sets (net 5) is not allowed, and no netting at all gives 50.
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