Exposure (also Risk Exposure) is a general term in risk management that aims to capture the potential financial loss inherent in a contract, transaction, portfolio etc.
Exposure is a meaningful term and is used widely in the market and credit risk contexts. It is notoriously difficult to define in the context of operational risk. A Limit framework and many other risk and/or portfolio management concepts require a precise definition of exposure values for the assets, off-balance sheet items or other financial positions the framework seeks to limit or manage. The precise definition of the exposure relevant to a given risk management application typically requires detailed considerations around the of
Credit Risk Exposure
In the context of credit risk there has been substantial formalization and standardization of the concept of exposure as it became one of the key Risk Parameters identified and required for implementation of the Basel II framework. This key metric is the so called Exposure At Default.
A significant consideration, especially in the context of the analysis of Credit Risk Concentration is the fact that different exposures may be substantially linked, e.g., via economic and / or legal ties and constructs, to the degree that in the case of a credit event, it is the collection of all such linked exposures that is the relevant metric. The concept of Related Counterparties thus leads to aggregation rules to obtain the Single Obligor Exposure.
Issues and Challenges
- Definitional and legal subtleties (e.g. linked exposures)
- Data collection / Data Quality
- Difficulty of establishing exposure for operational risk