Dear David,
I’ve have struggling with the following question from FRM practice and past exams. Appreciate your kind help on this!
3) On Credit Exposure and Netting (FRM Exam 2000, question 56)
A diversified portfolio of OTC derivatives with a single counterparty has a net mark-to-market value of $29 million and a gross (sum of absolute values) mark-to-market value of $75 million. If there are no netting agreements in place with the counterparty, what is the current credit exposure to the counterparty?
Answer provided: exposure is gross minus net, or $46 million.
My question: I have a different solution as shown below:
Suppose the value of all positive value positions sums up to L and likewise S is the absolute value for summing all negative value positions and taking absolute value. Then net mark-to-market value of $29 million means that |L| – |S| = 29; gross (sum of absolute values) mark-to-market value of $75 million means that |L| + |S| = 75. Adding these two equations gets: 2|L| = 104 so L can be solved as 52, which is then substituted back to the equation and allows us to get |S| = 75 – 52 = 23. Therefore, the current credit exposure when there is no netting agreements is the summation of all positive values only, which is L = 52.
There is a discrepancy between my answer and the answer provided (46). What’s more, it seems that my way of calculating is different from theirs.
Thank you for your enlightenment and correction!
Cheers
Liming
10/11/09
I’ve have struggling with the following question from FRM practice and past exams. Appreciate your kind help on this!
3) On Credit Exposure and Netting (FRM Exam 2000, question 56)
A diversified portfolio of OTC derivatives with a single counterparty has a net mark-to-market value of $29 million and a gross (sum of absolute values) mark-to-market value of $75 million. If there are no netting agreements in place with the counterparty, what is the current credit exposure to the counterparty?
Answer provided: exposure is gross minus net, or $46 million.
My question: I have a different solution as shown below:
Suppose the value of all positive value positions sums up to L and likewise S is the absolute value for summing all negative value positions and taking absolute value. Then net mark-to-market value of $29 million means that |L| – |S| = 29; gross (sum of absolute values) mark-to-market value of $75 million means that |L| + |S| = 75. Adding these two equations gets: 2|L| = 104 so L can be solved as 52, which is then substituted back to the equation and allows us to get |S| = 75 – 52 = 23. Therefore, the current credit exposure when there is no netting agreements is the summation of all positive values only, which is L = 52.
There is a discrepancy between my answer and the answer provided (46). What’s more, it seems that my way of calculating is different from theirs.
Thank you for your enlightenment and correction!
Cheers
Liming
10/11/09
