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Potential Future Exposure

Potential Future Exposure is actually derived from MTM and revaluing the portfolio and considered an estimate of MTM, but at a specific point in future

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.

Owais Siddiqui
1 min read
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