Potential Future Exposure

Potential Future Exposure (PFE) is defined as the maximum expected credit exposure over a specified period of time calculated at some level of confidence.

PFE is a measure of counterparty risk/credit risk. It is calculated by evaluating existing trades done against the possible market prices in future during the lifetime of transactions. It can be called sensitivity of risk w.r.t market prices. The calculated expected maximum exposure value is not to be confused with the maximum credit exposure possible. Instead, the maximum credit exposure indicated by the PFE analysis is an upper bound on a confidence interval for future credit exposure.

Credit risk managers have traditionally remained focused on current exposure measurement (i.e., current mark-to-market exposure, plus outstanding receivables) and collateral management. The problem with this focus is that it places excessive emphasis on the present and fails to provide an acceptable indication of credit risk at some point in the future. Because losses from credit risk take a relatively long time to evolve, a more useful measure of exposure is potential exposure. Potential exposure is not like current exposure. It exists in the future and therefore represents a range or distribution of outcomes rather than a single point estimate.

Read more about Potential Future Exposure:  Relevance

Famous quotes containing the words potential and/or future:

    Raising a daughter is an extremely political act in this culture. Mothers have been placed in a no-win situation with their daughters: if they teach their daughters simply how to get along in a world that has been shaped by men and male desires, then they betray their daughters’ potential But, if they do not, they leave their daughters adrift in a hostile world without survival strategies.
    Elizabeth Debold (20th century)

    The “second sight” possessed by the Highlanders in Scotland is actually a foreknowledge of future events. I believe they possess this gift because they don’t wear trousers.
    —G.C. (Georg Christoph)