Explanation:
Without a netting agreement, counterparty credit exposure is the sum of the positive mark-to-market (MtM) values of the individual positions. The financial institution only faces losses on contracts where it has a positive value (since it is owed money), as it would still be obligated to fulfill contracts with a negative value to the defaulting counterparty's estate. Exposure without netting = .
With a netting agreement, the exposure is the maximum of zero and the net sum of all MtM values across all positions. Exposure with netting = .
Therefore, the loss would be USD 20 million if netting is used, and USD 44 million if netting is not used.
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| Position | Exposure (USD) |
|---|---|
| Long swaptions | 32 million |
| Long credit default swaps | 12 million |
| Long currency derivatives | -16 million |
| Long futures contracts | -8 million |
If the investment company defaults, what would be the loss to the financial institution if netting is used compared to the loss if netting is not used?
A
Loss of USD 20 million if netting is used; loss of USD 24 million if netting is not used
B
Loss of USD 20 million if netting is used; loss of USD 44 million if netting is not used
C
Loss of USD 24 million if netting is used; loss of USD 32 million if netting is not used
D
Loss of USD 20 million if netting is used; loss of USD 24 million if netting is not used
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