Quiz: Mitigation and Management

Last reviewed: September 26, 2026

This is a draft, shown for review before publication.

6 questions to check your understanding of the chapter “Mitigation and Management”. Choose an answer and select “Check answer” to see the answer and explanation. You can also open “Answer and explanation” to see the answer first.

Question 1
As a hypothetical example, a bank has three interest rate swaps with one counterparty. From the bank's side, their market values are 400 million yen, −300 million yen, and 100 million yen. All three are in the same netting set covered by an agreement on close-out netting, and no collateral is exchanged. If the counterparty failed now, what would the bank's exposure be?
1. A.500 million yen
2. B.200 million yen
3. C.800 million yen
Answer and explanation
Answer: B
The exposure is 200 million yen. With close-out netting, exposure is the positive part of the total market value of all the trades. The total is 400 − 300 + 100 = 200 million yen, which is positive. The trade with a negative market value offsets the trades with positive values.

500 million yen is the amount without close-out netting. It treats the trade with a negative market value as zero and adds up only the positive trades (400 + 100). 800 million yen counts the negative market value as if it were positive (400 + 300 + 100). A trade with a negative market value is one where the bank owes the counterparty, so it is not part of the amount the bank could lose.

From the counterparty's side, the market values are −400 million yen, 300 million yen, and −100 million yen, for a total of −200 million yen. The counterparty's exposure is zero with close-out netting and 300 million yen without it. If the second trade's market value were −600 million yen, the total would be −100 million yen. The bank would then owe the counterparty 100 million yen, and the bank's exposure would be zero.
Learn more: Risk Reduction through Netting and Collateral
Question 2
As a hypothetical example, a bank has an interest rate swap with a counterparty and exchanges variation margin with it every day under a credit support annex (CSA). The threshold and the minimum transfer amount are both zero. When the counterparty fails and collateral stops being exchanged, market value and collateral are both zero. Assume that no other market prices move during the margin period of risk (MPOR), the period from then until the trades are closed out. In which case do interest payments during this period make the bank's exposure jump?
1. A.When the counterparty pays the bank interest on a net basis
2. B.Whenever either the bank or the counterparty pays interest on a net basis
3. C.When the bank pays the counterparty interest on a net basis
Answer and explanation
Answer: C
The exposure jumps when the bank pays. Collateral is set by the market value one MPOR earlier, and that value includes the amount about to be paid as a liability. Once the bank pays, the liability disappears and the market value rises by that amount, but collateral does not increase. For example, if the bank pays a net 40 million yen, the market value rises to 40 million yen while collateral stays at zero, so exposure is 40 million yen. Because collateral had been keeping up with the market value, the rise equals the amount paid.

If the counterparty is the one paying, the amount due was already in the market value before collateral stopped being exchanged, and the bank had received collateral for it, so no jump occurs. The exposure therefore does not jump by the amount paid whichever side pays. Even with daily collateral exchange, payments during the MPOR can leave exposure that collateral has not caught up with.
Learn more: Risk Reduction through Netting and Collateral
Question 3
Under the sound practices described in the US supervisory guidance revised in June 2026, what value does a financial institution normally use to measure the usage it compares with each counterparty's credit limit?
1. A.The largest of the potential future exposure (PFE) values calculated for each future date
2. B.The expected exposure (EE) calculated for each future date, averaged to maturity (EPE)
3. C.The PFE from the SA-CCR (standardized approach for counterparty credit risk) formula, based on notional amount, maturity, and other inputs
Answer and explanation
Answer: A
Usage is normally measured by the maximum PFE for each counterparty. PFE is a high percentile (often 95% or 99%) of the distribution of exposure at each future date. It is calculated date by date out to the maturity of the longest trade, and the largest of these values is used. This is because a high-percentile value represents the amount of risk the institution accepts from a single counterparty.

EE is a measure suited to credit risk models that combine many counterparties and to the calculation of CVA, and EPE (expected positive exposure) is EE averaged to maturity. Neither is a high-percentile value, so neither is used as the usage compared with a credit limit. The PFE in SA-CCR is a value that capital adequacy rules derive without a model. It is calculated from the notional amount, maturity, supervisory factors set by regulators for each asset class, and other inputs. Although it has the same name, it serves a different purpose from the maximum PFE used internally for credit limits, and the two values do not match even for the same counterparty.
Learn more: Credit Limit Management
Question 4
As a hypothetical example, a bank has a credit limit of 2 billion yen for a nonfinancial company, and current usage is 1.2 billion yen. A new interest rate swap would be covered by the same close-out netting agreement as the existing trades. The pre-trade check shows usage of 1 billion yen for the new trade alone and 1.7 billion yen with the trade added to the existing trades. Following the credit limit procedures, what is the result of the check?
1. A.The sum of 1.2 billion yen and 1 billion yen, 2.2 billion yen, exceeds the limit, so the front office must seek approval from a more senior authority
2. B.Usage of 1.7 billion yen with the trade added stays within the limit, so the front office can execute the trade
3. C.Usage of 1 billion yen for the trade alone stays within half the limit, so the front office can execute the trade
Answer and explanation
Answer: B
The front office can execute the trade. Usage is calculated for the counterparty's whole portfolio, so the decision is based on usage with the trade added to the existing trades, not on the new trade alone. 1.7 billion yen stays within the 2 billion yen limit (85% of the limit is used).

2.2 billion yen is the existing usage plus the usage of the new trade alone. Close-out netting reduces usage, so usage with the trade added can be smaller than this sum (1.7 billion yen here). 1 billion yen overlooks the 1.2 billion yen from the existing trades.

If usage with the trade added were 2.3 billion yen, it would exceed the limit by 300 million yen. The front office could not execute the trade as it stands and would seek approval from a designated, more senior authority. After execution, the risk management unit recalculates usage at least daily. Usage can exceed the limit through market moves even without a new trade (a passive excess), and this goes through the same approval process as an excess caused by a new trade.
Learn more: Credit Limit Management
Question 5
As a hypothetical example, a bank has a netting set under a margin agreement. The total market value is 800 million yen from the bank's side, the threshold is 200 million yen, and the minimum transfer amount is 50 million yen. The bank has received 600 million yen of variation margin in cash in the same currency, with no initial margin, and PFE is 100 million yen (a hypothetical value, not one derived from the formula in the notice). Under SA-CCR in Japan's capital adequacy notice as of September 2026, what is the exposure at default (EAD) of this netting set?
1. A.420 million yen
2. B.1,260 million yen
3. C.350 million yen
4. D.490 million yen
Answer and explanation
Answer: D
EAD is 490 million yen. Under SA-CCR, EAD is 1.4 × (replacement cost + PFE). With a margin agreement, the replacement cost is $\max\{V - C,\ TH + MTA - NICA,\ 0\}$ . $V$ is the total market value, $C$ is collateral, $TH$ is the threshold, and $MTA$ is the minimum transfer amount. $NICA$ is collateral excluding variation margin, and it is zero here because there is no initial margin. The notice calls the threshold the "credit limit amount," the minimum transfer amount the "minimum collateral delivery amount," and EAD the "credit equivalent amount." The volatility adjustment (haircut) for cash collateral is 0%, so collateral stays at 600 million yen.

$V - C$ is 800 − 600 = 200 million yen. $TH + MTA - NICA$ is 200 + 50 − 0 = 250 million yen. The replacement cost is the larger value, 250 million yen. EAD is 1.4 × (250 + 100) = 490 million yen.

The 420 million yen figure uses only $V - C$ , 200 million yen, as the replacement cost (1.4 × (200 + 100)). The threshold and minimum transfer amount are exposure not covered by collateral, so they set a floor on the replacement cost. The 350 million yen figure leaves out the 1.4 multiplier (250 + 100). The 1,260 million yen figure uses the total market value as the replacement cost without subtracting collateral (1.4 × (800 + 100)).
Learn more: Overview of the Regulatory Treatment of Counterparty Risk
Question 6
According to a 2018 article, advanced financial institutions manage CVA centrally in a CVA desk that is independent of the other trading desks. Which work does the CVA desk handle?
1. A.Setting the amount of the credit limit for each counterparty, based on the counterparty's creditworthiness and financial condition
2. B.Deciding that the CVA cost at the time of the trade is allocated to the CVA desk rather than to the business that brought in the trade
3. C.Handling CVA hedging and CVA risk management in one place
Answer and explanation
Answer: C
The CVA desk handles CVA hedging, CVA risk management, the pricing function, and the review of collateral agreements. CVA is a way of putting into the price the cost of preparing for a counterparty's default, and the CVA desk takes on, in one place, the response to that cost changing with market movements.

Setting credit limits is work of credit risk management. A risk management unit independent of the trading business sets the limit by looking at the counterparty's creditworthiness and financial condition. The CVA cost at the time of the trade is allocated to the business that brought in the trade, not to the CVA desk. Credit risk management and CVA management differ in the measure they use, in how they set an upper bound, and in who carries them out, so one does not necessarily take over the other's work.

Not every financial institution has a CVA desk.
Learn more: Counterparty Risk and XVA

Question 1

Question 2

Question 3

Question 4

Question 5

Question 6