Credit Risk Management Practice Exam

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Which exposure metric reflects a counterparty's current obligation?

Expected MtM
Effective EPE
Expected Negative Exposure
Potential Future Exposure

The correct answer is: Expected MtM

The correct choice regarding the exposure metric that reflects a counterparty's current obligation is the Expected Mark-to-Market (Expected MtM). This metric assesses the current value of the net cash flows related to contracts with a specific counterparty. In essence, it provides an estimate of what the current value of the counterparty's obligations is, taking into account market values and how they fluctuate over time. This makes it particularly relevant for assessing risks inherent in financial transactions, as it directly correlates to the real time exposure faced by institutions. In contrast, other metrics such as Effective Expected Exposure (Effective EPE) and Potential Future Exposure focus more on forecasting potential exposures over varying time horizons rather than reflecting the current obligation. Expected Negative Exposure measures the expected negative value under different conditions but does not directly align with capturing the immediate obligation of a counterparty. Thus, Expected MtM stands out as the most accurate representation for understanding a counterparty's current financial commitment.