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

A risk manager compares the expected positive exposure of a daily-margined portfolio with that of an otherwise identical uncollateralised portfolio. Which statement best explains why collateralisation does not eliminate exposure?

Residual exposure remains because of the margin period of risk. After the last successful margin exchange, the counterparty may default and the position must be closed out and replaced, and market value can move against the bank during that interval, leaving unsecured exposure.

  1. AExposure can still rise during the margin period of risk between the last successful margin call and close-out of the positionCorrect
  2. BCollateral is always posted at the end of the trade's maturity, so exposure persists until then
  3. CNetting agreements increase the gross positive mark-to-market of the portfolio
  4. DVariation margin only applies to wrong-way risk trades

Explanation

Even with daily margining, there is a delay from the last margin exchange through default, dispute resolution, close-out and replacement. Market moves during this margin period of risk create residual exposure. The other options misstate how margin and netting work.

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