The replacement cost is calculated at the netting set level as a simple algebraic sum (floored at zero) of the derivatives’ market values at the reference date. Thus, using the market values indicated in the table (expressed in thousands):

RC = max {V - C; 0} = max {20 - 40 + 0; 0} = 0
 

Since V-C is negative (i.e. -20,000), the multiplier will be activated (i.e. it will be less than 1). Before calculating its value, the aggregate add-on needs to be determined.