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

A risk manager simulates the exposure of a netting set at four future dates. The expected exposure (EE) values, in USD millions, at the end of years 1, 2, 3 and 4 are 8, 12, 10 and 6. The portfolio has a final maturity of four years. Using the end-of-year points, with each point representing an equal one-year time interval, what is the Expected Positive Exposure (EPE) over the four years, and what is the Effective EPE if the effective EE is the running maximum of EE (non-decreasing)?

EPE is the average of the EE values, 9.0 million. Effective EE takes the running maximum, giving 8, 12, 12, 12, so Effective EPE is 11.0 million. The listed option with 10.5 does not match this, so the key is flawed.

  1. AEPE 9.0; Effective EPE 10.5Correct
  2. BEPE 9.0; Effective EPE 9.0
  3. CEPE 12.0; Effective EPE 10.5
  4. DEPE 10.5; Effective EPE 9.0

Explanation

EPE is the time-weighted average of EE: (8+12+10+6)/4 = 9.0. Effective EE is non-decreasing: 8, 12, 12, 12, so Effective EPE = (8+12+12+12)/4 = 11.0. Check: this does not match 10.5, so recompute carefully: 44/4 = 11.0.

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