## Netting Agreement

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

### Netting Agreement

Pls explain below calculation :

(2) 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?

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)

Select one:
a. USD 6,914
b. USD 8,612
c. USD 2,341
d. USD 14,899
Feedback
The correct answer is C
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
The correct answer is:
USD 2,341

pradeeppdy
Finance Junkie
Posts: 258
Joined: Thu Sep 20, 2012 3:42 pm

### Netting Agreement

Your explanation and answer seems correct.
Can you please provide us reference.

rinku.rohra85
Posts: 4
Joined: Wed Nov 27, 2013 3:31 pm
Hello Mr. Pradeep,

This question is from PRM Exam 3.
By solving : 763 + 6914 + 2439 - 1504 = 8612
so why it is taken as 2341. Pls explain

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