Glossary entry
Exposure is the extent to which an investment or portfolio is affected by a particular asset, market, currency, or risk factor. It can be described in money, portfolio percentages, or sensitivity measures. For derivatives, cash paid upfront may be much smaller than the economic exposure, so account balance alone can understate risk.
Illustrative example
A portfolio holding several exporters may have substantial exposure to the same foreign currency even when the companies operate in different business sectors.
What to consider
Distinguish gross, net, and notional exposure. Offsetting positions can reduce one risk while leaving liquidity, timing, or counterparty risk.
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