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.
Sign up free to see the explanation and track your rank →
More FRM Part 2 Credit Risk practice
- According to the structural Merton model, the equity of a levered firm can be viewed as wh
- What is the primary reason why risk-neutral probabilities of default (PD) extracted from c
- A bank utilizes a 'through-the-cycle' (TTC) rating system. During a sharp economic downtur
- If the Area Under the Curve (AUC) from the Receiver Operating Characteristic (ROC) is 0.85
- A Merton-style structural credit model treats a firm's equit… — In this framework, what do
- For a derivatives portfolio, which Counterparty Credit Risk (CCR) metric is primarily used
- In the comparison of rating system philosophies, which system is characterized by stable r
- A bank's internal model for Credit Value Adjustment (CVA) us… — Why is this required by re