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FRM Part II · FRM Exam Part II · Credit Value Adjustment

The simulated exposure profile of an uncollateralised interest rate swap yields the following expected exposure (EE) values at annual time points, with discount factors ignored for this exercise: year 1 = 2.0m, year 2 = 3.0m, year 3 = 4.0m, year 4 = 3.0m, and year 5 = 1.0m. Using the trapezoid-free simple average of the five EE points, what is the expected positive exposure (EPE)?

EPE is 2.6m. It is the time average of the expected exposure profile, found by summing the five values (13.0m) and dividing by five. The 4.0m figure is the peak exposure, not the average, and the sum is not divided by the number of periods.

  1. A2.6mCorrect
  2. B3.0m
  3. C4.0m
  4. D13.0m

Explanation

EPE is the average of EE over time: (2+3+4+3+1)/5 = 13/5 = 2.6m. The 4.0m is the peak EE, not the average. The 13.0m is the unaveraged sum, and 3.0m is the median, which does not match the definition.

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