FRM Part I · FRM Exam Part I · Central Clearing
Bank A and Bank B have three OTC derivative trades with each other under a single legally enforceable bilateral netting agreement. The current mark-to-market values to Bank A are +USD 30 million, -USD 12 million and +USD 5 million. If Bank B defaults today with no collateral held, what is Bank A's exposure to Bank B?
Bank A's exposure is USD 23 million. Under a legally enforceable bilateral netting agreement, positive and negative trade values are offset, so 30 minus 12 plus 5 equals 23 million. The USD 35 million figure ignores netting and counts only the positive trades.
- AUSD 35 million
- BUSD 23 millionCorrect
- CUSD 47 million
- DUSD 30 million
Explanation
With enforceable netting, the values are summed: 30 - 12 + 5 = 23 million. Without netting, Bank A would count only positive values, 30 + 5 = 35 million, which is the gross exposure and is the key distractor. Adding absolute values gives 47, which is wrong.
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