Combining positive and negative values with one counterparty into a single net amount on default. It cuts exposure when legally enforceable.
Where you will meet it
Netting comes up in 43 learning outcome notes across the FRM syllabus.
A few of them:
Introduction to Derivatives FRM Part I · Financial markets and products
“It is largest in OTC trades and is reduced by clearing, netting and collateral.”
The Governance of Risk Management FRM Part I · Foundations of risk management
“It also depends on valuations verified by finance through independent price verification, and on documentation reviewed by legal, for example whether netting agreements are enforceable.”
Measuring Credit Risk FRM Part I · Valuation and risk models
“Netting agreements, collateral and close-out terms change exposure and must be modelled by netting set.”
Fundamentals of Credit Risk FRM Part II · Credit risk measurement and management
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