Current Exposure Method


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.

BREAKING DOWN '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."

  1. Swap

    A derivative contract through which two parties exchange financial ...
  2. Credit Risk

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

    The event in which companies or individuals will be unable to ...
  4. Settlement Risk

    The risk that one party will fail to deliver the terms of a contract ...
  5. In The Money

    1. For a call option, when the option's strike price is below ...
  6. Hedge

    Making an investment to reduce the risk of adverse price movements ...
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