There are two parts to this post.
The first deals with a Practice Question Q 49 from 2018.
The second modifies that to test the concept of multilateral netting.
Q 49. Four derivative counterparties have entered into bilateral netting arrangements. The exhibit below presents a summary of their bilateral mark-to-market (MtM) trades.
If netting agreements exist between all pairs of counterparties shown, what is the correct order of net exposure per counterparty, from highest to lowest?
A. P,Q,S,R
B. Q,R,S,P
C. R,Q,P,S
D. S,P,Q,R
A is correct. The properly netted amounts are:
For counterparty P: Q = 8-6= $2; R = 10-2 = $8; S = 4-4 = 0; for a sum of $10.
For counterparty Q: P = 15-16 =-1 = $0, R = 6-0 = $6; S = 7-8 = -1 = $0; for a sum of $4.
For counterparty R: P = 6-6 = $0; Q = 4-5 =-1 = $0; S = 8-12=-4 = $0; for a sum of $0.
For counterparty S: P = 2-2 = $0, Q = 13-10 = $3; R = 1-1 = $0; for a sum of $3.
Therefore, the correct sequence of net exposure amounts per counterparty, from highest to lowest, is P, Q, S, and R.
Note that a negative netted amount means the counterparty has no exposure.
I have two observations :
i) The MTM exposure values of different CPs are not same: For e.g. The trade between P&Q should have similar (but opposite) values. But there are trades of +8 & -6 from P's perspective and a trade of 15 & -16 from Q's perspective.
ii) CP Q's final exposure should be $6 (incorrectly mentioned as $4).
Now coming to the question:
I want to find the benefit due to multilateral netting over bilateral netting and see if I am getting the right answer. But first we would have to modify the above question to maintain consistency in exposure. I have attached the snapshot of the modified figure which shows the trade exposures under no-netting, bilateral netting and multilateral netting.
Please refer the 2nd snapshot for the trade exposures & benefits due to bilateral netting & multilateral netting and suggest whether the approach & answer arrived at is correct or not conceptually.
Thanks,
The first deals with a Practice Question Q 49 from 2018.
The second modifies that to test the concept of multilateral netting.
Q 49. Four derivative counterparties have entered into bilateral netting arrangements. The exhibit below presents a summary of their bilateral mark-to-market (MtM) trades.
If netting agreements exist between all pairs of counterparties shown, what is the correct order of net exposure per counterparty, from highest to lowest?
A. P,Q,S,R
B. Q,R,S,P
C. R,Q,P,S
D. S,P,Q,R
A is correct. The properly netted amounts are:
For counterparty P: Q = 8-6= $2; R = 10-2 = $8; S = 4-4 = 0; for a sum of $10.
For counterparty Q: P = 15-16 =-1 = $0, R = 6-0 = $6; S = 7-8 = -1 = $0; for a sum of $4.
For counterparty R: P = 6-6 = $0; Q = 4-5 =-1 = $0; S = 8-12=-4 = $0; for a sum of $0.
For counterparty S: P = 2-2 = $0, Q = 13-10 = $3; R = 1-1 = $0; for a sum of $3.
Therefore, the correct sequence of net exposure amounts per counterparty, from highest to lowest, is P, Q, S, and R.
Note that a negative netted amount means the counterparty has no exposure.
I have two observations :
i) The MTM exposure values of different CPs are not same: For e.g. The trade between P&Q should have similar (but opposite) values. But there are trades of +8 & -6 from P's perspective and a trade of 15 & -16 from Q's perspective.
ii) CP Q's final exposure should be $6 (incorrectly mentioned as $4).
Now coming to the question:
I want to find the benefit due to multilateral netting over bilateral netting and see if I am getting the right answer. But first we would have to modify the above question to maintain consistency in exposure. I have attached the snapshot of the modified figure which shows the trade exposures under no-netting, bilateral netting and multilateral netting.
Please refer the 2nd snapshot for the trade exposures & benefits due to bilateral netting & multilateral netting and suggest whether the approach & answer arrived at is correct or not conceptually.
Thanks,
