FRM Part II · FRM Exam Part II · Derivatives
Under the Basel SA-CCR framework, exposure at default for a derivatives netting set is computed as alpha multiplied by the sum of which two components?
SA-CCR exposure at default equals alpha, set at 1.4, times the sum of replacement cost and potential future exposure. Replacement cost captures current collateral-adjusted exposure, while PFE adds an allowance for future market movements over the horizon. The other combinations are not part of the formula.
- AReplacement cost and potential future exposureCorrect
- BExpected exposure and effective maturity
- CCurrent exposure and stressed VaR
- DMargin period of risk and add-on for CVA
Explanation
SA-CCR sets EAD = alpha x (RC + PFE), with alpha equal to 1.4. Replacement cost reflects current exposure net of collateral and PFE is the add-on for potential future movements. The other pairs are not components of the SA-CCR formula.
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