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FRM Part II · FRM Exam Part II · Netting, Close-out and Related Aspects

Bank A has four trades with Counterparty X under one enforceable netting agreement, with mark-to-market values to Bank A of +14 million, +9 million, -12 million and -5 million. X defaults, and no collateral is held. What is Bank A's exposure with and without netting?

With netting, exposure is the sum of all values: 14 plus 9 minus 12 minus 5 equals 6 million. Without netting, only positive trades count, giving 23 million, because the bank must still pay on its negative trades to the defaulted estate.

  1. A6 million with netting; 23 million without nettingCorrect
  2. B6 million with netting; 6 million without netting
  3. C23 million with netting; 6 million without netting
  4. D17 million with netting; 23 million without netting

Explanation

Net = 14 + 9 - 12 - 5 = 6 million. Without netting, the bank's exposure is the sum of positive values only: 14 + 9 = 23 million, since it must still pay on negative trades. Option 3 reverses the two; option 4 nets only one trade.

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