hard · Frm Part 2 Credit Risk
A netting set has two trades with a counterparty: Trade A (MTM = +20m) and Trade B (MTM = -15m).
If the bank also holds $10m 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 20m; netting is only recognized if the trades are in the same 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 5m; the MPoR captures the risk that the counterparty fails to post more collateral.
- Current exposure is -5m; the MPoR is irrelevant as the bank is over-collateralized.
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