Credit exposure netting Garp practice 2008 38

[john.ophof]

38. Company EFG is a large derivative market-maker that has many contracts with counterparty JKL, some
transacted in the same legal jurisdiction and others across different legal jurisdictions. As a result, EFG
has some contracts with JKL covered under legally enforceable netting agreement A, some contracts with
JKL covered under legally enforceable netting agreement B, and some contracts with JKL with no netting
agreement. Ignoring the effect of margin, if the current value (i.e., market value of the contract minus
collateral and recovery value) and the netting agreement status of each contract with JKL are as shown
below, what is EFG’s current counterparty credit exposure to JKL?
Contract Netting Agreement Status Current Value
1 Covered by Netting Agreement A USD 2,105
2 Covered by Netting Agreement A (-USD 3,319)
3 Covered by Netting Agreement A USD 1,977
4 Covered by Netting Agreement B USD 5,876
5 Covered by Netting Agreement B (-USD 633)
6 Covered by Netting Agreement B (-USD 2,335)
7 Covered by Netting Agreement B USD 4,006
8 Not Covered by any Netting Agreement USD 2,439
9 Not Covered by any Netting Agreement (-USD 1,504)
a. USD 8,612
b. USD 6,914
c. USD 14,899
d. USD 2,341
Answer: d
a. Incorrect. This is just the sum of the current values, which ignores both the non-negativity of credit
exposures and the effect of the netting agreements.
b. Incorrect. This is the maximum of the four categories of exposures (those covered by A, those
covered by B, 8 and 9).
c. Incorrect. This reverses the max and summation function in each case.
d. Correct.
Explanation: Let PVi denote the EFG’s current value to JKL of contract i. Given the netting agreement
coverage, current counterparty credit exposure to JKL (CE) is:
CE = max(PV1+ PV2+ PV3, 0) + max(PV4+ PV5+ PV6 + PV7, 0) + max(PV8, 0)+max(PV9, 0)
= max(USD763, 0) + max(USD6914, 0) + max(USD2439, 0) + max(-USD1504, 0)
= USD763 + USD6914 + USD2439 + 0
= USD10,116

So I can follow the explanation and can see it result in 10116 but how does this relate to answer d (2341)?

 

[phwdisse]

Hi Jop

The answer most be 10,116 but it's not in the answers.

There are more mistakes in the questions of the practis exam. In the same exam question 40,these answer ia else than the question. The questions asked for a *correclty* statement and the answer is given an *incorrectly* statement.

It takes al lot of time to make thise exams whith these mistakes.

Regards,

Paul

 

[David Harper CFA FRM]

I get 10,116 here. The explanation looks right. David