Total exposure without netting = $4 million + $7 million + $2 million = +$13 million
Total exposure with netting $13 million - $5 million - $3 million = +$5 million

Things to Remember

• Netting is the process of offsetting the value of multiple positions or payments due to be exchanged between two or more parties.
• Total exposure is the sum of the absolute values of all positive and negative MtM values of transactions with a counterparty.
• Netting reduces credit risk by consolidating multiple obligations between two parties into a single net obligation.
• Exposure without netting considers each transaction individually, while exposure with netting takes into account the offsetting effect of positive and negative values.