Credit exposure for derivatives is measured using

Current replacement values are a very poor measure of the credit exposure from a derivative

contract, because the future value of these instruments is unpredictable, ie is stochastic, and the

range of values it can take increases the further ahead in the future we look. Therefore it is common

for credit exposures for derivatives to be measured using forward looking exposure profiles, which

are distributions of the expected value of the derivative at the time horizon for which credit risk is

being measured. To be conservative, a high enough quintile of this distribution is taken as the 'loan

equivalent value' of the derivative as the exposure. Choice 'c' is the correct answer.

The notional value of derivative contracts generally tends to be quite high and unrelated to their

economic value or the counterparty exposure. Therefore notional value is irrelevant.