FRM Part I · FRM Exam Part I · Exchanges and OTC Markets
Bank A and Bank B have three outstanding OTC derivative trades under a single legally enforceable master netting agreement. The mark-to-market values to Bank A are +USD 12 million, -USD 5 million and +USD 3 million. If Bank B defaults, what is Bank A's exposure after close-out netting?
Bank A's exposure is USD 10 million. With an enforceable master netting agreement, positive and negative trade values are offset on default, so 12 minus 5 plus 3 gives a single net claim, rather than the USD 15 million gross positive exposure.
- AUSD 15 million
- BUSD 10 millionCorrect
- CUSD 20 million
- DUSD 3 million
Explanation
Under close-out netting, the values are summed: 12 - 5 + 3 = USD 10 million. Option USD 15 million ignores netting and counts only positive-value trades. USD 20 million adds absolute values, and USD 3 million takes only the smallest trade.
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