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FRM Part II · FRM Exam Part II · Credit Value Adjustment

A risk manager reviews a portfolio of uncollateralised OTC derivatives with one counterparty. Which exposure metric is the time-weighted average of the expected exposure profile and is commonly used as the exposure input in a simple CVA approximation?

Expected positive exposure is the time-weighted average of the expected exposure profile. It is used as a simple exposure input for CVA because CVA reflects average loss, whereas PFE and peak exposure capture tail percentiles used for limit setting.

  1. APotential future exposure at the 97.5th percentile
  2. BExpected positive exposureCorrect
  3. CPeak exposure
  4. DNegative expected exposure

Explanation

Expected positive exposure (EPE) is the average of the expected exposure profile over time. PFE and peak exposure are high-percentile measures used for limits, not average loss pricing. Negative expected exposure relates to the institution's own default and DVA.

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