GARP.FRM.PQ.P2 2016 GARP PQ - Question 52 -Netting

[no_ming]

Hi, Mr. Harper, the following is a netting question from 2016 practice exam Q52,

I understand the 33mn can be netted off, but for the swaptions, the position is positive market value, why is the remaining 21mn is losses to the bank?

 

[David Harper CFA FRM]

Hi @no_ming In this question, the type of instruments don't really matter as the question is giving you the mark-to-market value ("current market value") of the positions. Credit exposure is max(value, 0). So the credit exposure here without netting is 54, but with netting it is only 21:

• Without netting: max(0, +21) + max(0, -33) + max(0, +33) = 54
• With netting: max(0, 21 - 33 + 33) = 21