Suppose that a financial institution has two derivatives transactions outstanding with different counterparties, X and Y. Which of the following is true?

(a) The total expected exposure in one year on the two transactions is the sum of the expected exposure on the transaction with X and the expected exposure on the transaction with Y.

(b) The total present value of the cost of defaults is the sum of the present value of the cost of defaults on the transaction with X plus the present value of the cost of defaults on the transaction with Y.

(c) The 95 percentile for the total exposure in one year on both transactions is the sum of the 95 percentile for the exposure in one year on the transaction with X and the 95 percentile for the exposure in one year on the transaction with Y.

Explain your answers.

AppendixLO1