Skip to content

FRM Part II · FRM Exam Part II · Counterparty Risk and Beyond

Which statement best describes potential future exposure (PFE) at a 95% confidence level for a given future date?

PFE at 95% confidence is the 95th percentile of the distribution of exposure at the future date. It measures a worst-case exposure at that confidence level, unlike expected exposure, which averages positive values, or expected loss, which also incorporates default probability and loss given default.

  1. AThe average of positive portfolio values at that date
  2. BThe 95th percentile of the distribution of exposure at that dateCorrect
  3. CThe loss expected from default, equal to exposure times probability of default times loss given default
  4. DThe maximum of the expected exposure profile over the life of the trades

Explanation

PFE is a high quantile of the exposure distribution at a future date, so 95% PFE is the 95th percentile of exposure. The average of positive values is expected exposure. Exposure times PD times LGD is expected loss. The maximum of the EE profile is maximum expected exposure, not PFE.

Did you get it right without looking?

One question tells you little. A timed set on Counterparty Risk and Beyond shows your real accuracy, how long you take and where you lose marks.

Practise Counterparty Risk and BeyondFree diagnostic mock

More Counterparty Risk and Beyond questions