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FRM Part II · FRM Exam Part II · Future Value and Exposure

A risk analyst builds a Monte Carlo engine to estimate the future exposure of a portfolio of interest rate swaps with a single counterparty. Which sequence best describes the standard steps of the simulation?

The correct sequence is to simulate risk factor paths over a grid of future dates, revalue the netted portfolio on every path and date, floor the values at zero, and then compute statistics such as expected exposure and PFE across paths at each date.

  1. ASimulate risk factor paths over future dates, revalue the netted portfolio on each path and date, floor values at zero, then compute exposure statistics across paths for each dateCorrect
  2. BRevalue the portfolio today, scale the value by a volatility multiple for each future date, and take the maximum across dates as the exposure
  3. CSimulate only the final maturity date, revalue the portfolio once, and apply the result to all earlier dates
  4. DSimulate risk factor paths, average the portfolio value across paths without flooring, and report the mean as the exposure

Explanation

Exposure simulation generates scenarios for the risk factors at a grid of future dates, reprices the portfolio (applying netting) in each scenario, takes the positive part, and then derives statistics such as EE and PFE per date. Averaging without flooring ignores that exposure is only the positive part of value.

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