Skip to content

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

A risk manager compares the exposure profiles of two uncollateralised trades with the same counterparty and same maturity: a 5-year interest rate swap and a 5-year cross-currency swap with a final notional exchange. Which profile pattern is most consistent with theory?

The interest rate swap typically has a hump-shaped exposure profile because uncertainty grows while remaining payments shrink. The cross-currency swap has exposure that keeps rising toward maturity because the final notional exchange leaves large FX-driven value uncertainty until the end.

  1. ABoth profiles peak at inception and decline linearly to zero
  2. BThe interest rate swap profile is hump-shaped, peaking before maturity, while the cross-currency swap exposure tends to rise toward maturity because of the final exchangeCorrect
  3. CThe interest rate swap exposure rises until maturity, while the cross-currency swap profile is hump-shaped
  4. DBoth profiles are flat because exposure depends only on notional

Explanation

A swap's exposure uncertainty grows with time while remaining cash flows shrink through amortising effect, so the interest rate swap shows a hump. In a cross-currency swap, the large final notional exchange keeps FX-driven uncertainty high until maturity, so exposure increases toward the end. Option 2 reverses these.

Did you get it right without looking?

One question tells you little. A timed set on Future Value and Exposure shows your real accuracy, how long you take and where you lose marks.

Practise Future Value and ExposureFree diagnostic mock

More Future Value and Exposure questions