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."

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