Explanation:
Statement (b) is false.
The value 5.4 represents the Maximum Expected Exposure (Max EE), which is the highest point on the Expected Exposure (EE) curve.
Peak exposure (often used synonymously with Potential Future Exposure or Maximum PFE) represents a high percentile (e.g., 95% or 99%) of the distribution of future exposures at a given date. Since the chart only provides the Expected Exposure (the mean of the distribution at each point in time) and its derivatives (Non-decreasing EE, Averages), we do not have information about the tail of the distribution. Therefore, neither Peak Exposure nor Potential Future Exposure (PFE) can be inferred from this chart.
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707.1. The following plots the exposure profile for a given netting set:
Expected exposure (EE)
Non-decreasing EE
Avg (Non-decreasing EE)
Avg (Expected exposure)
Expected exposure (EE)
Non-decreasing EE
Avg (Non-decreasing EE)
Avg (Expected exposure)
Each of the lines in this chart is a function of the expected exposure (EE), which is plotted with green circular markers. The solid dark green line is a non-decreasing EE. The light blue horizontal line is the time-weighted average of the expected exposure; the red horizontal line is the time-weighted average of the non-decreasing EE. Each of the following statements is true about this exposure profile EXCEPT, which is false?
A
Effective EPE is about 4.2
B
Peak exposure is about 5.4
C
Expected positive exposure (EPE) is about 3.4
D
Potential future exposure (PFE) cannot be inferred from the chart