Skip to content

FRM Part I · FRM Exam Part I · Exchanges and OTC Markets

Two banks, Bank A and Bank B, have three OTC derivative trades between them under a single ISDA Master Agreement with a legally enforceable close-out netting clause. From Bank A's perspective the trade values are +USD 12 million, -USD 7 million and +USD 3 million. If Bank B defaults, what is Bank A's exposure to Bank B after close-out netting?

Bank A's exposure is USD 8 million. Close-out netting under an enforceable master agreement allows all trade values to be summed into one amount: 12 minus 7 plus 3 equals 8. Without netting, exposure would be the sum of positive values only, USD 15 million.

  1. AUSD 15 million
  2. BUSD 8 millionCorrect
  3. CUSD 22 million
  4. DUSD 5 million

Explanation

With enforceable close-out netting, the values are summed: 12 - 7 + 3 = USD 8 million. Without netting, Bank A would count only positive values (12 + 3 = 15), which is the first option's error. Using the absolute sum gives 22, and 5 incorrectly nets only part of the trades.

Did you get it right without looking?

One question tells you little. A timed set on Exchanges and OTC Markets shows your real accuracy, how long you take and where you lose marks.

Practise Exchanges and OTC MarketsFree diagnostic mock

More Exchanges and OTC Markets questions