Netting agreement

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

Netting agreement

(1) 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 Correct
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

My question : Total comes to \$10116 so why correct answer is \$2341 ?

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

Netting agreement

Contract details of above question :

Contract Netting Agreement Status Current Value
1 Covered by Netting Agreement A USD 2,105
2 Covered by Netting Agreement A (-USD 3,319)
3 Covered by Netting Agreement A USD 1,977
4 Covered by Netting Agreement B USD 5,876
5 Covered by Netting Agreement B (-USD 633)
6 Covered by Netting Agreement B (-USD -2,335)
7 Covered by Netting Agreement B USD 4006
8 Not covered by any Netting Agreement USD 2,439
9 Not covered by any Netting Agreement (-USD 1,504)