Under bilateral netting, net exposure between two counterparties A and B is max(0,ExposureA−ExposureB).
- Firm 1’s bilateral net exposures: to Firm 2 = max(0,90−60)=30; to Firm 3 = max(0,12−70)=0. Total = 30. (A is incorrect)
- Firm 2’s bilateral net exposures: to Firm 1 = max(0,60−90)=0; to Firm 3 = max(0,57−0)=57. Total = 57. (B is incorrect)
- Firm 3’s bilateral net exposures: to Firm 1 = max(0,70−12)=58; to Firm 2 = max(0,0−57)=0. Total = 58.
Under central clearing, exposures are netted multilaterally against the central counterparty (CCP).
- Firm 1 net position vs CCP = (90−60)+(12−70)=30−58=−28.
- Firm 2 net position vs CCP = (60−90)+(57−0)=−30+57=+27.
- Firm 3 net position vs CCP = (70−12)+(0−57)=58−57=+1.
Since Firm 1 owes the CCP 28 million, the CCP's exposure to Firm 1 is 28 million. The CCP owes Firm 2 (27 million) and Firm 3 (1 million), so its exposure to them is 0. Thus, the CCP’s total net exposure is
$28 + 0 + 0 = 28$ million. (D is correct, C is incorrect because Firm 3's exposure to CCP is 1 million).
