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. Credit Risk

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

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

    The event in which companies or individuals will be unable to ...
  4. In The Money

    1. For a call option, when the option's strike price is below ...
  5. Swap

    Traditionally, the exchange of one security for another to change ...
  6. Credit Default Swap - CDS

    A particular type of swap designed to transfer the credit exposure ...
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