FRM Part II · FRM Exam Part II · Derivatives
Under the Basel standardised approach for counterparty credit risk (SA-CCR), exposure at default is EAD = alpha x (RC + PFE), with alpha = 1.4. A bank has an unmargined netting set with a current replacement cost (RC) of USD 10 million and an aggregate potential future exposure add-on (PFE) of USD 18 million, with no multiplier reduction (multiplier = 1). What is the EAD?
EAD equals alpha of 1.4 times the sum of replacement cost of 10 million and potential future exposure of 18 million, so 1.4 times 28 equals USD 39.2 million. The alpha scaling applies to the whole sum, and with a multiplier of one the add-on is unchanged.
- AUSD 28.0 million
- BUSD 39.2 millionCorrect
- CUSD 25.2 million
- DUSD 14.0 million
Explanation
EAD = 1.4 x (10 + 18) = 1.4 x 28 = USD 39.2 million. Omitting alpha gives 28.0. Applying alpha only to PFE gives 10 + 25.2 = 35.2, not listed; applying alpha only to RC-less add-on gives 25.2. Half of 28 gives 14.
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