**Questions:**

206.1. Acme Bank is the counterparty to Downtown Dealer in three derivative contracts. Close-out netting applies to all contracts between the two counterparties. From Acme's perspective, the current contract values are:

- 1st contract: +4.0 million to Acme (Acme is owed $4.0 million; or is "in the money")
- 2nd contract: +2.5 million to Acme
- 3rd contract: -8.0 million (Acme owes to DD $8.0 million; or is "out of the money")

a. Zero

b. $1.5 million

c. $8.0 million

d. $14.5 million

206.2. For a portfolio of derivative contracts, Analyst Jane wants to estimate her firm's counterparty exposure on a future target date, T(1), which is one year forward. For convenience, she assumes the future value of the portfolio at that time, T(1) has a normal distribution with a mean of zero (an equal likelihood of a gain/ITM or loss/OTM on the position) and standard deviation of $3.0 million. Of course, Jane realizes this is an unrealistic assumption and that a Monte Carlo simulation is unlikely to produce a forward normal distribution! Nevertheless, consider the following two statements:

**I. The Expected Exposure, EE[T(1)], is equal to zero**

**II. The Potential Future Exposure, PFE[T(1)], is almost $7.0 million**

Which is (are) true?

a. Neither

b. I. is true

c. II is true

d. Both are true

206.3. Consider the exposure profile of a vanilla fixed-for-floating interest rate swap with a maturity (tenor) of five (5) years. Each of the following is true EXCEPT which is false?

a. The expected positive exposure (EPE) must be LESS THAN the largest value among the set of expected exposures, EE(t1), EE(t2), etc

b. The maximum potential future exposure (MPFE) is likely to occur after the fourth year due to the amortization effect

c. Expected exposure is likely to be an increasing function for approximately the initial 1.5+ years the diffusion effect

d. There will be several values of EE(t) and PFE(t) but only a single expected positive exposure (EPE) and a single potential future exposure (PFE)

**Answers:**