for whichis not?a)These are profiles for long CDS protection where the expected recover rate is 30%b)For a given confidence level, PFE must be less than or equal to ES (at the sameconfidence level) because ES corresponds to the expected exposure conditional onbeing above the relevant PFE valuec)At the 95% confidence level, increasing exposure in the early stages corresponds toscenarios in which the CDS premium (credit spread) will have widenedd)The abrupt jump displayed by the 98% PFE is due to a wrong-way risk correlationparameter: if this were switched to zero, the jump will disappear

66Answers:413.1. B. False. The reverse: in a typical upward-sloping yield curve scenario, the payerswap (i.e., floating rate receiver) has greater credit exposureIn regard to (A), (B) and (D), each is TRUE.413.2. C. False. The high later values reflect the exposure due to a final exchange ofprincipal (in the cross-currency swap), unlike the notional reference in an interest rateswap.In regard to (A), (B) and (D), each is TRUE413.3. D. False. The abrupt jump is due to the small default probability.If a credit event istriggered, the exposure shifts (from the diffusion due to spread widening) to large exposure dueto contingent payoff, an exposure faced by the long CDS protection buyer.In regard to (A), (B) and (C), each is TRUE.The spreadsheet can be viewed here-CDS-exposure-profile.xlsm?dl=0Assumptions used for the CDS exposure profile include:Initial spread = 650Recovery rate = 30%Interest rate = 5%Spread volatility = 38.0%Confidence level = 98% (first sheet) and 95% (second sheet)Discuss in forum here:-profiles.7774/

67P2.T6.414. Impacts of netting and collateral on exposureAIM: Explain the impact of netting on exposure, the benefit of correlation, and calculatethe netting factor. Explain the impact of collateralization on exposure, and assess therisk associated with the remargining period.414.1. The following table illustrates the impact of netting when there is negative correlationbetween future values:The expected exposure should assume that each scenario has equal weight. Which isNEARESTto the netting factor?a) Zerob) 25%c) 50%d) 100%

68414.2. The following table illustrates the impact of netting when there is a positive future value(while the correlation is highly positive):The expected exposure should assume that each scenario has equal weight. Which isNEARESTto the netting factor?a) 35%b) 50%c) 65%d) 80%

69414.3. Similar to Gregory's example, assume a two-way CSA with the following identicalparameters for both counterparties:Threshold is equal to $1,000,000Independent amount is equal to zero for bothMinimum transfer amount (MTA) is equal to $100,000Rounding (up) equal to $25,000, andInitial collateral held, T(0), equal to zeroAs noted, the initial collateral held is zero for both counterparties. Consider the next two days,from the perspective of Party A:1.The portfolio mark to market (MtM) increases to $1,430,000 (1.430 million) on the firstday, T(1)2.

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