FRM Part II · FRM Exam Part II · Margin (Collateral) and Settlement
A netting set has a daily-remargined CSA with zero threshold. Using a simple square-root-of-time scaling, the 99% potential loss of the portfolio's value over a 1-day horizon is USD 2.0 million. The MPOR is 10 business days. What is the approximate 99% uncollateralised-in-the-gap exposure over the MPOR?
About USD 6.3 million. Under square-root-of-time scaling, the 1-day USD 2.0 million figure is multiplied by the square root of 10, roughly 3.162, giving USD 6.32 million. Linear scaling to USD 20 million wrongly ignores the diffusive growth of risk.
- AUSD 20.0 million
- BUSD 6.3 millionCorrect
- CUSD 2.0 million
- DUSD 4.5 million
Explanation
Scale by the square root of the MPOR: 2.0 x sqrt(10) = 2.0 x 3.162 = USD 6.32 million. Multiplying by 10 ignores diffusion of returns and gives USD 20 million. Using sqrt(5) = 2.236 gives USD 4.5 million, a wrong horizon.
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