Explanation:
Bank A’s exposure at the time of default is calculated based on the difference between the market value of the swap on the default day and the collateral posted, which was based on the market value 10 days prior. Since the market value increased from $40 million to $50 million, the collateral of $40 million is insufficient to cover the current market value. Therefore, Bank A is exposed to an additional $10 million that is unsecured because it exceeds the value of the collateral held.
A is incorrect. The existing collateral does not cover the entire current market value of the swap, leaving Bank A with unsecured exposure.
C is incorrect. While $40 million was the collateral value, this does not represent the exposure, which is actually the difference between the current market value and the collateral.
D is incorrect. The exposure is not the full market value of the swap, but the difference between the current market value and the collateral amount.
Ultimate access to all questions.
Q.6212 In a bilateral derivative transaction under an ISDA Master Agreement, two financial institutions, Bank A and Bank B, have an interest rate swap in place with a 10-day margin period of risk. Collateral must be posted to cover 100% of the exposure during this period. The current market value of the swap from Bank A’s perspective is $50 million, while 9 days ago, the exposure was recorded at $40 million. Bank B defaults on the 10th day, just before the next scheduled margin call. Using these values, calculate Bank A’s exposure at the time of Bank B’s default.
A
$0
B
$10 million
C
$40 million
D
$50 million
No comments yet.