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

Two portfolios with the same counterparty are netted under one agreement. Trade A has an expected positive exposure of 30 million and trade B has 20 million. Which statement about the netted exposure is most accurate?

Netted exposure cannot exceed the sum of standalone exposures, and the netting benefit shrinks as trade values become more positively correlated. With perfect positive correlation there is little offset, while negative correlation gives the largest reduction.

  1. AIt equals the sum of the two exposures, 50 million, regardless of correlation
  2. BIt is always at least as large as the larger standalone exposure
  3. CIt is never greater than the sum of the standalone exposures, and the benefit is smaller when trade values are highly positively correlatedCorrect
  4. DIt is zero if the trades have opposite signs of delta

Explanation

Netted exposure is at most the sum of standalone exposures. Netting benefit is greatest when trade values are negatively correlated and falls toward zero as correlation approaches +1. Netted exposure may be below the larger standalone exposure, so the second option is wrong.

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