In the early 1990s credit officers started evaluating the
Potential Future Exposure (PFE) of OTC derivative trades. The calculation was relatively easy as long as it was done on a trade-by-trade basis. The exposure, for instance, on a Japanese bank was equal to the sum of the trades’ expected exposures. The notion of add-on emerged as statistical averages of such calculations.
However netting progressively applied in most countries where this trading takes place, and the complexity of the calcul