What is Potential Future Exposure?
Potential Future Exposure is actually derived from mark to market and revaluing the portfolio and considered an estimate of MTM, but at a specific point in the future. Similar to Value at Risk, PFE is also based on a high confidence level, taking into account the worst-case scenario. The current MtM may follow a number of different possible paths into the future, so a probability distribution of PFE can be derived.
Example of Potential Future Exposure?
For example, an organization may calculate its potential future exposure as USD 10mn at a confidence interval of 99% for next one year. It means that “In the next one year, we are 99% confident that our gain in the swap will be $10 million or less.