## Netting arrangement

rinky63a
Good Student
Posts: 15
Joined: Fri Jul 27, 2012 3:42 pm

### Netting arrangement

Company EFG is a large derivative market-maker that has many contracts with counterparty JKL, some transacted in the same legal jurisdiction and others across different legal jurisdictions. As a result, EFG has some contracts with JKL covered under legally enforceable netting agreement A, some contracts with JKL covered under legally enforceable netting agreement B, and some contracts with JKL with no netting agreement. Ignoring the effect of margin, if the current value (i.e., market value of the contract minus collateral and recovery value) and the netting agreement status of each contract with JKL are as shown below, what is EFG’s current counterparty credit exposure to JKL?

Select one:
a. USD 6,914
b. USD 8,612
c. USD 2,341
d. USD 14,899
Feedback
USD 2,341.
Let PVi denote the EFG’s current value to JKL of contract i.e. Given the netting agreement coverage, current counterparty credit exposure to JKL (CE) is: CE = max(PV1 + PV2 + PV3, 0) + max(PV4 + PV5 + PV6 + PV7, 0) + max(PV8, 0)+max(PV9, 0) = max(USD 763, 0) + max(USD 6914, 0) + max(USD 2439, 0) + max(-USD 1504, 0) = USD 763 + USD 6914 + USD 2439 + 0 = USD10,116
USD 2,341

How is correct answer as 2341 as total comes to 10116 ?

vighnesh.mehta
Good Student
Posts: 16
Joined: Tue Sep 03, 2013 1:16 pm

### Netting arrangement

Hi,
Can you share the netting agreement status which is said to be mentioned below in the question, but not found.

Also it would be great if you can share the source of the question. Suppose the quiz name and the question number

rinky63a
Good Student
Posts: 15
Joined: Fri Jul 27, 2012 3:42 pm

### Netting arrangement

Sorry for inconvenience caused.

Contract Netting Agreement Status Current Value
1 Covered by A 2105
2 Covered by A (-3319)
3 Covered by A 1977
4 Covered by B 5876
5 Covered by B (-633)
6 Covered by B (-2335)
7 Covered by B 4006
8 Not Covered 2439
9 Not Covered (-1504)

Reference : Credit Exposure section Quiz