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

A risk manager compares the expected positive exposure (EPE) profile of an uncollateralised portfolio with the same portfolio under a daily-margined CSA with zero threshold and zero minimum transfer amount. Which statement best describes the residual exposure under the collateralised agreement?

Residual exposure is driven by the margin period of risk. Even with daily variation margin, the portfolio value can change between the last collateral exchange and the close-out and replacement of trades after default. Collateral therefore greatly reduces exposure but does not eliminate it.

  1. AExposure is eliminated entirely because variation margin is exchanged daily.
  2. BExposure is driven by the margin period of risk, as the portfolio value can move between the last margin call and close-out.Correct
  3. CExposure is larger than uncollateralised because collateral posting adds wrapper risk.
  4. DExposure depends only on the initial trade notional and not on market volatility.

Explanation

Even with daily margining, there is a lag between the last successful collateral exchange and close-out, the margin period of risk. Value changes over that period create residual exposure. Exposure is reduced, not eliminated, and remains volatility dependent.

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