Learning Objectives: Differentiate among current exposure, peak exposure, expected exposure, and expected positive exposure. Explain the treatment of counterparty credit risk (CCR) both as a credit risk and as a market risk and describe its implications for trading activities and risk management for a financial institution.
Questions:
25.1.1. You are provided with the quarterly exposure data for an OTC Total Return Swap position. The table below represents the credit/debit exposure for the swap:
Based on the above information, which row most accurately represents the current exposure, expected exposure, and expected positive exposure by the end of Q4 2023?
a. Current Exposure: $0.00, Peak Exposure $30, Expected Exposure: $5.38m and Expected Positive Exposure of $8.6m
b. Current Exposure: -$10m, Peak Exposure $30m, Expected Exposure: $13.33m and Expected Positive Exposure of $13.33m
c. Current Exposure: $0.00, Peak Exposure $30m, Expected Exposure: $8.6m and Expected Positive Exposure of $5.38m
d. Current Exposure: -$10, Peak Exposure $30m, Expected Exposure: $5.38m and Expected Positive Exposure of $8.6m
25.1.2. Over a period of 5 months, the bank has had counterparty exposures as follows:
Based on the above information, which row represents the Expected Positive Exposure, Effective Expected Positive Exposure, and the maximum potential future exposure correctly?
a. EPE = $6.6m, EEPE = $9m and Maximum PFE = $19.6m
b. EPE = $9m, EEPE = $6.6m and Maximum PFE = $7.84m
c. EPE = $6.6m, EEPE = $10m and Maximum PFE = $19.6m
d. EPE = $6.6m, EEPE = $12.9m and Maximum PFE = $19.6m
25.1.3. BAC Bank (‘the Bank’) enters into a 5-year Interest Rate Swap contract with Counterparty XYZ, which has a notional amount of $100 million. The counterparty credit risk information is given as follows:
The Bank is evaluating market risk factors that could impact the Credit Valuation Adjustment (CVA), specifically anticipating a potential 20-basis-point increase in credit spreads due to an economic downturn. The Bank’s risk department has indicated that this credit spread increase would raise the PD to 1.7%.
Using the provided data, identify which option correctly represents the Expected Loss (EL), treating Counterparty Credit Risk (CCR) purely as a credit risk, and the adjusted CVA accounting for market risks related to increased credit spreads?
a. EL $450,000 as credit risk adjustment; Adjusted CVA $510,000 as market risk adjustment.
b. EL $450,000 as market risk adjustment; Adjusted CVA $510,000 as credit risk adjustment.
c. EL $450,000 as credit risk adjustment; Adjusted CVA $850,000 as market risk adjustment.
d. EL $960,000 as credit risk adjustment; Adjusted CVA $850,000 as market risk adjustment.
Answers here:
Questions:
25.1.1. You are provided with the quarterly exposure data for an OTC Total Return Swap position. The table below represents the credit/debit exposure for the swap:
Based on the above information, which row most accurately represents the current exposure, expected exposure, and expected positive exposure by the end of Q4 2023?
a. Current Exposure: $0.00, Peak Exposure $30, Expected Exposure: $5.38m and Expected Positive Exposure of $8.6m
b. Current Exposure: -$10m, Peak Exposure $30m, Expected Exposure: $13.33m and Expected Positive Exposure of $13.33m
c. Current Exposure: $0.00, Peak Exposure $30m, Expected Exposure: $8.6m and Expected Positive Exposure of $5.38m
d. Current Exposure: -$10, Peak Exposure $30m, Expected Exposure: $5.38m and Expected Positive Exposure of $8.6m
25.1.2. Over a period of 5 months, the bank has had counterparty exposures as follows:
Based on the above information, which row represents the Expected Positive Exposure, Effective Expected Positive Exposure, and the maximum potential future exposure correctly?
a. EPE = $6.6m, EEPE = $9m and Maximum PFE = $19.6m
b. EPE = $9m, EEPE = $6.6m and Maximum PFE = $7.84m
c. EPE = $6.6m, EEPE = $10m and Maximum PFE = $19.6m
d. EPE = $6.6m, EEPE = $12.9m and Maximum PFE = $19.6m
25.1.3. BAC Bank (‘the Bank’) enters into a 5-year Interest Rate Swap contract with Counterparty XYZ, which has a notional amount of $100 million. The counterparty credit risk information is given as follows:
The Bank is evaluating market risk factors that could impact the Credit Valuation Adjustment (CVA), specifically anticipating a potential 20-basis-point increase in credit spreads due to an economic downturn. The Bank’s risk department has indicated that this credit spread increase would raise the PD to 1.7%.
Using the provided data, identify which option correctly represents the Expected Loss (EL), treating Counterparty Credit Risk (CCR) purely as a credit risk, and the adjusted CVA accounting for market risks related to increased credit spreads?
a. EL $450,000 as credit risk adjustment; Adjusted CVA $510,000 as market risk adjustment.
b. EL $450,000 as market risk adjustment; Adjusted CVA $510,000 as credit risk adjustment.
c. EL $450,000 as credit risk adjustment; Adjusted CVA $850,000 as market risk adjustment.
d. EL $960,000 as credit risk adjustment; Adjusted CVA $850,000 as market risk adjustment.
Answers here:
