FRM Part II · FRM Exam Part II · Future Value and Exposure
A risk manager reviews a portfolio of uncollateralised OTC derivatives with a single counterparty. At a future date t, the mark-to-market value of the netting set is -USD 8 million. What is the exposure of the bank to the counterparty at that date?
The exposure is zero. Exposure equals the maximum of the netting set value and zero, since a bank can only lose if the counterparty owes it. A mark-to-market of -USD 8 million means the bank is the debtor, so it has no credit exposure at that date.
- AUSD 8 million
- BUSD 0Correct
- C-USD 8 million
- DUSD 16 million
Explanation
Exposure is the greater of the portfolio value and zero, because the bank loses only if the counterparty owes it money. With a value of -8 million the bank owes the counterparty, so the exposure is max(-8, 0) = 0. Reporting 8 million treats the negative value as a positive claim, which is the absolute value mistake.
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