FRM Part I · FRM Exam Part I · Exchanges and OTC Markets
A dealer has two uncleared OTC trades with the same counterparty: a swap worth +USD 12 million to the dealer and a forward worth -USD 5 million to the dealer. A legally enforceable bilateral netting agreement covers both trades. If the counterparty defaults, what is the dealer's credit exposure, ignoring collateral and recovery?
The exposure is USD 7 million. With an enforceable netting agreement, the positive and negative values with the same counterparty offset, so 12 minus 5 gives the net amount owed. Ignoring netting would wrongly give 12 million.
- AUSD 12 million
- BUSD 7 millionCorrect
- CUSD 5 million
- DUSD 17 million
Explanation
With enforceable netting, exposure is the net value: 12 - 5 = USD 7 million. Using only the positive trade (12) ignores netting; 17 adds absolute values; 5 considers only the negative trade, which is not an exposure for the dealer.
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