Exposure (finance)

This article deals with exposure in a financial context, for exposure in photography see Exposure (photography)

The exposure ( english commitment , use of debt , risk is) in Banking a Anglizismus for open risk positions of financial instruments and underlying assets within the business volume .

General

The term “exposure” was initially used by non-banks for open foreign currency positions . The exposure should always be determined as an open daily position for each currency within a company's financial and liquidity planning. To determine the exposure, all expected cash flows up to the planning horizon must be forecast. The term later extended to all risk positions of a company and finally made its way into the financial sector . In recent literature , the terms credit equivalent or credit exposure are sometimes equated.

Reference values

As reference values are used in banks underlying assets or financial instruments in question, in particular credit transactions , securities , foreign exchange , varieties , precious metals , derivatives or commodities . Their inventory leads to credit risks , market risks ( exchange rate risk , currency risk ) and / or interest rate risks . According to the Capital Adequacy Ordinance (CRR), these risks must be backed by the financial institution's own funds . The starting point for the calculation is the risk position value in accordance with Art. 111 (1) CRR. To avoid this self-commitment, the banks are indirectly proprietary trading forced these open positions as possible to close out . Closed positions are not to be backed with own funds.

In the approach chosen by the Capital Adequacy Ordinance, the credit risk is determined by the probability of default, the default volume and the default loss rate :

• The probability of default is the probability of a credit event occurring ,
• The default volume measures the amount of the loan amount threatened by the loan default in the future . Credit lines and facilities , the utilization of which can fluctuate over time, are of crucial importance for this . There is a positive correlation between the rating of the borrower and the utilization of such credit lines , so that if the creditworthiness deteriorates, the likelihood of higher credit utilization increases.
• The default loss ratio (or less loss ratio) is the proportion of the time of failure not re-recoverable amount of credit, the complement of the recovery rate (rate of repayment and from the recovery of collateral group).

The default volume stands for the "exposure risk". Correspondingly, in share trading one speaks of a share exposure , in foreign exchange trading of foreign exchange exposure , etc., by which the market values ​​of these balance sheet items are to be understood. In the case of credit insurance , the exposure is the amount threatened by default or default, the exposure risk is accordingly the uncertain damage burden at the time of the insured event .

species

There is the transaction exposure ( English transaction exposure ), conversion exposure ( English translation exposure ) and the strategic exposure ( English strategic exposure ).

• The transaction exposure relates to currency risks that result from appreciation or depreciation of foreign currency liabilities or receivables.
• The translation exposure is the risk that foreign currencies will develop unfavorably due to the exchange rate when accounting for the balance sheet date .
• The strategic exposure is in non-banks, the danger of exchange rate changes that adversely affect the exports or imports impact.

Open positions

Open positions are all active ( passive ) risk positions that are not offset by an equally high and congruent passive (active) position. An open position also exists if future payments ( payments ) are not offset by payments (payments) at the same time ( liquidity risk ).

An open active position is also called a “long” or plus position , an open passive position is correspondingly referred to in technical terms as a “short” or negative position . A bank that has 120% "long" and 50% "short" positions in its total foreign currency holdings has a net exposure of 70%. The net exposure is a risk measure for the market risk in the portfolio :

${\displaystyle {\text{Marktrisiko des Netto-Exposure}}={\frac {{\text{Long-Positionen}}-{\text{Short-Positionen}}}{\text{Eigenmittel}}}\cdot 100\,\%}$

In the case of banks, only the net exposures need to be backed with own funds (Art. 204 (1) CRR). If all positions are closed out, no capital adequacy is required. As gross exposure ( English large-exposure ) is defined as the addition of "Long" - and "short" positions to be able to recognize the sum of all open positions. The above foreign exchange portfolio therefore has a gross exposure of 170%.

Exposure strategies

Through hedging , open positions are closed out and the capital burden is removed. It requires counter-trades that are identical in currency, amount and term . With netting , the positions to be offset are netted so that a net exposure remains as a surplus. This can be a “short” or “long” position that can be closed out by hedging. Netting is very important for determining the actual exposure. Holdings are assigned to the IFRS categories Held to Maturity , Held for Trading or Available for Sale .

rating

First of all, the exposure of each financial instrument is determined on the balance sheet date. There are instruments with a stable exposure (the exposure is close to par as with floaters ) and with a market-dependent variable exposure (such as fixed-interest bonds ). After that, any changes in value due to the rating must be taken into account. The volatilities of the financial instruments are then summarized and an aggregated portfolio volatility is calculated from which the value at risk can be derived.

According to the market valuation method, all open positions of derivative financial instruments are to be valued either with the current replacement costs ( English current exposure ) or with an add-on , a term- related surcharge as future replacement costs ( potential exposure ). The internal bank settlement risk ( pre-settlement risk ) is an exposure that results from the current market value ( current exposure ) and the expected over the entire duration of the maximum change in value ( potential exposure composed). In this way, the term “exposure” also includes replacement costs as part of the performance risk.

See also

• Wrong Way Risk

Individual evidence

1. ↑ Michael Adler / Bernard Dumas, Exposure to Currency Risk , in: Financial Management, vol. 13, 1984, p. 42
2. ↑ Dieter Gehrmann / Hans-Eckart Scharrer, Currency Risk and Currency Behavior of German Companies in Foreign Trade , 1978, p. 284
3. ^ Robert Boothe / Jeff Madura, Long Range Planning , 1985, p. 101
4. ↑ Thomas Söhlke, Regulatory recording of credit risk , 2002, p. 14
5. ↑ Maria Stefanova, Recovery Risk in Credit Portfolio Modeling , 2011, p. 5 ff.
6. ↑ Martin Ackermann, The importance of securitization of receivables for internal auditing using the example of credit pooling , in: Axel Becker / Arno Kastner (eds.), Review of the credit business by internal auditing, 2007, p. 535
7. ↑ Eva Wagner, Credit Default Swaps and Information Content , 2008 p. 9 FN 33
8. ↑ Steffen Ciupke, Wertpotenziale der Kreditversicherung , 2008, p. 13
9. ↑ Springer Fachmedien (ed.), 250 keywords banking: basic knowledge for specialists and executives , 2016, p. 72 f.
10. ^ Matthias S. Beck, Foreign exchange management: Exchange rate risks from an operational and strategic point of view , 1989, p. 22
11. ↑ Henner Schierbeck, Profit-oriented database management , Volume 2: risk control and capital structure management , 1999, p 234
12. ↑ Reinhold Hölscher / Ralph Elfgen (eds.), Challenge Risk Management , 2002, p. 534