medium · FRM Part 2 Credit Risk
A netting set has two trades with a counterparty: Trade A (MTM = +20 m) and Trade B (MTM = -15 m).
If the bank also holds $10 m in cash collateral (variation margin) from the counterparty, what is the current net exposure and what risk remains captured in the Margin Period of Risk (MPoR)?
- Current exposure is 20 m, since bilateral netting under an ISDA is only recognized when trades share the same settlement currency.
- Current exposure is zero; the remaining risk is the potential change in MTM over the next 10 days before the position can be closed out.
- Current exposure is 5 m; the MPoR here instead captures the risk the counterparty later fails to post additional required collateral.
- Current exposure is -5 m, and the MPoR is considered irrelevant here because the bank is already fully over-collateralized against the counterparty.
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