Current Exposure Method

AAA

DEFINITION of 'Current Exposure Method'

A system used by financial institutions to measure the credit risk of losing anticipated cash flows from forwards, swaps, options and other derivatives contracts they are party to, in the event the counterparty to the contract should default. An investor's total exposure, under the current exposure method, is equal to the replacement cost of all marked to market contracts currently in the money, plus the credit exposure risk of potential changes in future prices or volatility of the underlying asset.

INVESTOPEDIA EXPLAINS 'Current Exposure Method'

The current exposure method is used in financial risk management to measure the cost of default within a swap agreement. Under the international regulatory requirements of the Basel Committee on Banking Supervision, alternatives to the current exposure method are the standardized method and the internal model method.





The current exposure method is also refered to as "current pre-settlement exposure."

RELATED TERMS
  1. Default Risk

    The event in which companies or individuals will be unable to ...
  2. Swap

    Traditionally, the exchange of one security for another to change ...
  3. Settlement Risk

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

    The risk of loss of principal or loss of a financial reward stemming ...
  5. In The Money

    1. For a call option, when the option's strike price is below ...
  6. Cash-And-Carry Trade

    A trading strategy in which an investor buys a long position ...
Related Articles
  1. Using Economic Capital To Determine ...
    Personal Finance

    Using Economic Capital To Determine ...

  2. How Risk Free Is The Risk-Free Rate ...
    Options & Futures

    How Risk Free Is The Risk-Free Rate ...

  3. Managing Interest Rate Risk
    Options & Futures

    Managing Interest Rate Risk

  4. Corporate Bonds: An Introduction To ...
    Bonds & Fixed Income

    Corporate Bonds: An Introduction To ...

comments powered by Disqus
Hot Definitions
  1. Days Sales Of Inventory - DSI

    A financial measure of a company's performance that gives investors an idea of how long it takes a company to turn its inventory ...
  2. Accounts Payable - AP

    An accounting entry that represents an entity's obligation to pay off a short-term debt to its creditors. The accounts payable ...
  3. Ratio Analysis

    Quantitative analysis of information contained in a company’s financial statements. Ratio analysis is based on line items ...
  4. Days Payable Outstanding - DPO

    A company's average payable period. Calculated as: ending accounts payable / (cost of sales/number of days).
  5. Net Sales

    The amount of sales generated by a company after the deduction of returns, allowances for damaged or missing goods and any ...
  6. Over The Counter

    A security traded in some context other than on a formal exchange such as the NYSE, TSX, AMEX, etc. The phrase "over-the-counter" ...
Trading Center