FRM Part I · FRM Exam Part I · Swaps
A dealer has two offsetting swaps with the same counterparty under a legally enforceable netting agreement. Swap A has a current value of +USD 6 million to the dealer and Swap B has a current value of -USD 4 million to the dealer. If the counterparty defaults today, what is the dealer's credit exposure, ignoring collateral and recovery?
The exposure is USD 2 million. Under an enforceable netting agreement the positive and negative swap values with the same counterparty are offset, so +6 million and -4 million net to +2 million, which is what the dealer could lose on default before any recovery.
- AUSD 6 million
- BUSD 10 million
- CUSD 2 millionCorrect
- DUSD 4 million
Explanation
With netting, the values are combined: +6 - 4 = +2 million. This positive net value is the dealer's exposure. Using 6 million ignores netting (the gross positive value). Using 10 million adds absolute values, which is wrong.
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