[George Bilkis]

Thanks for the reply.

I would expect exposure to be not a loosely defined term as a bank has to use it in order to calculate the regulatory or economic capital, and a bank has to chose which number it is going to use.

The PRM Handbook defines exposure for bonds in III.B.3 as “notional + mean accrued value”.

In one of the questions here (riskprep.com) in simulated exams, exposure was defined as a price paid for the loan on the secondary market, i.e. marked-to-market value of the loan.

My question is regarding this discrepancy in definitions between PRM handbook and Riskprep.com?

Question with numbers:
A loan to corporate customer was purchased for 96USD (bank paid 96USD to another party)
Notional amount on the loan: $100, no coupons.
Time to maturity: 1 year
Implied interest rate (continuous compounding) = ln(100/96) = 4.08%
Bank intends to hold the loan till maturity (i.e. banking book, credit risk)

What is the exposure immediately after the deal: is it $96 (market value) or $100 (notional amount)?
What is the exposure 6 month after (6 month before maturity), market value is no longer observable.

Is it the notional discounted with the same discount rate, that is (I assume continuous discounting):
discounted value 6 months prior to maturity: 100*exp(-0.0408*0.5) = $97.98

or is it still $100?

G

[Author]

Posts