Chapter 8
Credit Exposure
There is no security on this earth, there is only opportunity.
General Douglas MacArthur (1880–1964)
This chapter will be concerned with defining credit exposure (often known just as exposure) in more detail and expanding the key characteristics. We then explain the important metrics used for the quantification of credit exposure. Typical exposure profiles for various instruments will be discussed and we will explain the impact of netting and collateral on exposure. Understanding exposure is relevant for the following reasons:
- Trade approval by comparing against credit limits.
- Pricing (and hedging) counterparty risk (CVA).
- Calculating economic and regulatory capital.
