Aggregate Risk

AAA

DEFINITION of 'Aggregate Risk'

The exposure of a bank, financial institution, or any type of major investor to foreign exchange contracts - both spot and forward - from a single counterparty or client. Aggregate risk in forex may also be defined as the total exposure of an entity to changes or fluctuations in currency rates.

INVESTOPEDIA EXPLAINS 'Aggregate Risk'

Banks and financial institutions closely monitor aggregate risk in order to minimize their exposure to adverse financial developments - such as a credit crunch or even insolvency - arising at a counterparty or client. This is achieved through position limits that stipulate the maximum dollar amount of open transactions that can be entered into for spot and forward currency contracts at any point in time.


Aggregate risk limits will generally be larger for long-standing counterparties and clients with sound credit ratings, and will be lower for clients who are either new or have lower credit ratings.

RELATED TERMS
  1. Credit Rating

    An assessment of the credit worthiness of a borrower in general ...
  2. Credit Risk

    The risk of loss of principal or loss of a financial reward stemming ...
  3. Settlement Risk

    The risk that one party will fail to deliver the terms of a contract ...
  4. Position Limit

    The highest number of options or futures contracts an investor ...
  5. Exposure At Default - EAD

    A total value that a bank is exposed to at the time of default. ...
  6. Prime Credit

    A credit score that falls into the range that is one step down ...
RELATED FAQS
  1. What can cause a security to go from investment grade to "junk" grade?

    The most common reason for a debt security downgrade from investment grade to junk grade is a negative change in the bond ... Read Full Answer >>
  2. Why should I consider looking for the A.M. Best rating before investing in an insurance ...

    An investor considering equity investments in the insurance industry is well advised to check the A.M. Best rating, because ... Read Full Answer >>
  3. What risk factors should investors consider before purchasing a callable bond?

    A number of risk components should be considered in regard to any bond investment since bonds, like any investment, do carry ... Read Full Answer >>
  4. Why do zero coupon bonds tend to be volatile?

    Zero coupon bonds are volatile because they do not pay any periodic interest during the life of the bond. Upon maturity, ... Read Full Answer >>
  5. Which markets are most prone to market failure from adverse selection?

    Adverse selection causes market failure -- a sub-optimal level of beneficial trades -- whenever material information cannot ... Read Full Answer >>
  6. What is the long-term outlook of the banking sector?

    The long-term outlook of the banking sector remains cyclical, but with less volatility than in the past. Given structural ... Read Full Answer >>
Related Articles
  1. Personal Finance

    Using Economic Capital To Determine Risk

    Discover how banks and financial institutions use economic capital to enhance risk management.
  2. Options & Futures

    Manage Risk With Trailing Stops And Protective Put Options

    Using the right strategy can lower the risk of failure and protect your profits.
  3. Options & Futures

    An Introduction To Value at Risk (VAR)

    Volatility is not the only way to measure risk. Learn about the "new science of risk management".
  4. Forex Education

    Understanding Forex Risk Management

    There's risk in every trade you take, but as long as you can measure risk, you can manage it.
  5. Forex Education

    Leverage's "Double-Edged Sword" Need Not Cut Deep

    Learn to cut out losses quickly, leaving profits room to grow.
  6. Forex

    Pros & Cons Of Dollar Cost Averaging

    The dollar-cost averaging approach helps investors avoid market timing but they give up some potential for higher returns.
  7. Investing Basics

    Understanding Non-Deliverable Forward (NDF)

    A foreign exchange hedging strategy where the parties agree to settle the profit or loss in a foreign currency futures contract before the expiration date.
  8. Forex Education

    How To Lock In An Exchange Rate

    Currency risk can be effectively hedged by locking in an exchange rate through the use of currency futures, forwards, options, or exchange-traded funds.
  9. Forex Education

    Top Economic Factors That Depreciate The $US

    A variety of factors contribute to currency depreciation, including monetary policy, inflation, demand for currency, economic growth and export prices.
  10. Credit & Loans

    How To Increase Your Appeal To Prospective Lenders

    Making a business eligible for loans/credit cards at the best possible rates requires crafting an excellent credit profile through the smart use of credit.

You May Also Like

Hot Definitions
  1. Mixed Economic System

    An economic system that features characteristics of both capitalism and socialism.
  2. Net Worth

    The amount by which assets exceed liabilities. Net worth is a concept applicable to individuals and businesses as a key measure ...
  3. Stop-Loss Order

    An order placed with a broker to sell a security when it reaches a certain price. A stop-loss order is designed to limit ...
  4. Covered Call

    An options strategy whereby an investor holds a long position in an asset and writes (sells) call options on that same asset ...
  5. Butterfly Spread

    A neutral option strategy combining bull and bear spreads. Butterfly spreads use four option contracts with the same expiration ...
  6. Unlevered Beta

    A type of metric that compares the risk of an unlevered company to the risk of the market. The unlevered beta is the beta ...
Trading Center