Explanation:
Marking to market refers to the daily settling of gains and losses due to changes in the market value of the underlying securities. When the mark-to-market value is positive, it indicates the counterparty owes the firm and, when the mark-to-market value is negative, the firm owes the counterparty.
In this scenario, the bank owes the counterparty some $35 million but is owed $31 million without netting.
With netting, the bank has a net exposure of - $4 million (= -$35 m + $31 m).
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Q.1865 A Bank has positions in four derivatives trades with a counterparty. From the bank's perspective, the following are the mark-to-market (MtM) values of the four positions: -$20.0 million, -$15.0 million, +$14.0 million, and +$17.0 million. The bank and the counterparty have a netting agreement between them. From the bank's perspective, what is the bank's exposure both without netting and with netting?
A
zero without netting; -$4.0 m with netting
B
$35.0 m without netting; -$31 m with netting
C
$31.0 m without netting; -$4.0 m with netting
D
$4 m without netting; $3.0 m with netting
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