FRM Part II · FRM Exam Part II · Netting, Close-out and Related Aspects
Bank A has three uncollateralised trades with Counterparty X under a legally enforceable close-out netting agreement. The trade mark-to-market values to Bank A are +12 million, -5 million and +3 million (USD). If X defaults, what is Bank A's exposure (credit loss before recovery) on this portfolio?
The exposure is USD 10 million. Under enforceable close-out netting, the positive and negative trade values are summed (12 - 5 + 3 = 10), and the bank is exposed to the positive net amount. Gross exposure of 15 million would apply only without netting.
- AUSD 10 millionCorrect
- BUSD 15 million
- CUSD 20 million
- DUSD 5 million
Explanation
With enforceable netting, the values are summed: 12 - 5 + 3 = 10, and exposure is max(10, 0) = USD 10 million. Without netting, exposure would be 12 + 3 = 15 million, which is the key distractor ignoring the netting benefit.
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