Financial Risk Manager Part 2

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Explanation:

D is correct. The CCP’s net exposure is AUD 28 million under central clearing. We express the positions – through the process of novation and netting – and present the results shown both in the table and the explanations below (note that a negative net exposure means a zero exposure):

Party	No Netting	Bilateral Netting	Central Clearing
Firm 1	90 + 12 = 102	90-60 + 12-70 = 30 + -58 = 30	90-60 + 12-70 = 30 -58 = -28 = 0
Firm 2	60 + 57 = 117	60-90 + 57-0 = -30 + 57 = 57	60-90 + 57-0 = -30 + 57 = 27
Firm 3	70	70-12 + 0-57 = 58 + -57 = 58	70-12 + 0-57 = 58-57 = 1
CCP	--	--	27 + 1 = 28
Total	289	145	56

Firm 1’s exposure to CCP = 90 + 12 = AUD 102 million; CCP’s exposure to Firm 1 = 60 + 70 = AUD 130 million. Hence, Firm 1’s exposure to CCP = AUD 0 million (= 102m − 130m = -28m = 0).
Firm 3’s exposure to CCP = AUD 70 million; CCP’s exposure to Firm 3 = 12 + 57 = AUD 69 million. Hence, Firm 3’s exposure to CCP = AUD 1 million (= 70m − 69m).
Firm 2’s exposure to CCP = 60 + 57 = AUD 117 million; CCP’s exposure to Firm 2 = AUD 90 million. Hence, CCP’s exposure to Firm 2 = AUD 27 million (= 117m − 90m).

A is incorrect. Firm 1 has a net exposure of AUD 30 million under bilateral netting as shown above.

B is incorrect. Firm 2 has a net exposure of AUD 57 million under bilateral netting as shown above.

Explanation:

Party	No Netting	Bilateral Netting	Central Clearing
Firm 1	90 + 12 = 102	90-60 + 12-70 = 30 + -58 = 30	90-60 + 12-70 = 30 -58 = -28 = 0
Firm 2	60 + 57 = 117	60-90 + 57-0 = -30 + 57 = 57	60-90 + 57-0 = -30 + 57 = 27
Firm 3	70	70-12 + 0-57 = 58 + -57 = 58	70-12 + 0-57 = 58-57 = 1
CCP	--	--	27 + 1 = 28
Total	289	145	56

Firm 1’s exposure to CCP = 90 + 12 = AUD 102 million; CCP’s exposure to Firm 1 = 60 + 70 = AUD 130 million. Hence, Firm 1’s exposure to CCP = AUD 0 million (= 102m − 130m = -28m = 0).
Firm 3’s exposure to CCP = AUD 70 million; CCP’s exposure to Firm 3 = 12 + 57 = AUD 69 million. Hence, Firm 3’s exposure to CCP = AUD 1 million (= 70m − 69m).
Firm 2’s exposure to CCP = 60 + 57 = AUD 117 million; CCP’s exposure to Firm 2 = AUD 90 million. Hence, CCP’s exposure to Firm 2 = AUD 27 million (= 117m − 90m).

A is incorrect. Firm 1 has a net exposure of AUD 30 million under bilateral netting as shown above.

B is incorrect. Firm 2 has a net exposure of AUD 57 million under bilateral netting as shown above.

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Question A junior risk analyst at a consulting firm is reviewing the operational arrangements of bilateral netting and central clearing of derivative trades. The analyst examines the following bilateral trades of three firms:

Firm 1’s exposure to Firm 2: AUD 90 million

Firm 2’s exposure to Firm 1: AUD 60 million

Firm 1’s exposure to Firm 3: AUD 12 million

Firm 3’s exposure to Firm 1: AUD 70 million

Firm 2’s exposure to Firm 3: AUD 57 million

Firm 3’s exposure to Firm 2: AUD 0 million

Which of the following statements is correct?

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Last updated: July 5, 2026 at 07:29

Under bilateral netting, Firm 1’s net exposure is AUD 28 million.

Under bilateral netting, Firm 2’s net exposure is AUD 27 million.

Under central clearing, Firm 3’s net exposure is AUD 0 million.

Under central clearing, the CCP’s net exposure is AUD 28 million.