FRM Part I · FRM Exam Part I · Central Clearing
Two banks, A and B, have three OTC derivative trades between them under a single legally enforceable netting agreement. The current mark-to-market values to Bank A are +$12 million, -$7 million and +$4 million. Ignoring collateral, what is Bank A's credit exposure to Bank B if B defaults today?
Bank A's exposure is $9 million. Under a legally enforceable netting agreement, positive and negative trade values are summed (12 - 7 + 4 = 9). Only the positive net amount is at risk on default. The $16 million figure ignores netting and counts only the positive trades.
- A$16 million
- B$9 millionCorrect
- C$11 million
- D$23 million
Explanation
With enforceable netting, the values are summed: 12 - 7 + 4 = $9 million, and exposure is max(net, 0) = $9 million. Without netting, exposure would be 12 + 4 = $16 million, which ignores the offset of the negative trade. $23 million adds absolute values, and $11 million nets only the first two trades with a sign error.
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