2 Exposure

This topic describes about the exposures.

In financial terms, an exposure represents the total potential risk an institution faces due to transactions, market movement, currency fluctuation, portfolio, or specific counterparty. This risk can come in many forms, such as credit risk, market risk (including currency and interest rate fluctuations), and operational risk. As such, exposures can arise from various sources as:
  • Credit Exposure: The credit exposure represents the total amount of risk a financial institution or company faces if a counterparty fails to meet its obligations.

    For example, a bank has a USD 10M loan exposure to a corporate borrower in the energy sector.

  • Market Exposure: The potential loss from fluctuations in market variables such as interest rates, foreign exchange rates, or commodity prices.

    For example, a bank that holds long-duration bonds, sensitive to interest rate changes.

  • Currency Exposure: When transactions occur in multiple currencies, a company or bank might be exposed to losses due to the unfavourable exchange rate movements.

    For example, the bank holds deposits or loans in yen. A change in the dollar/yen exchange rate affects the value of these items on the bank’s balance sheet.

    In essence, an exposure is the quantified risk that helps banks measure potential losses and determine the capital or reserves needed to cushion against adverse events.