Applied risk management series: Counterparty risk exposure metrics

Carlos Blanco outlines an approach to counterparty risk using potential future exposure

Applied risk management - Confronting counterparty risk with exposure metrics
A better approach: using forward-looking metrics, such as potential future exposure

Traditionally, the management of credit risk at energy and commodity trading firms has largely been a passive exercise, in which a credit limit is assigned to each trading counterparty, based primarily on its internal rating score. The most commonly used metric to capture counterparty exposures is the current exposure at a given point in time. This is calculated by adding the mark-to-market of any open deals to the net settlements, which include open accounts payable and receivable, as well as t

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