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PFE: ahead of its time

Potential future exposure models are fast becoming a ‘must have’ in the industry. Stephanie Courtin (below) of the UK Financial Services Authority discusses the main challenges when implementing them and outlines where firms fail to impress the regulator

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Potential future exposure (PFE) models attempt to estimate pre-settlement risk for market-sensitive instruments, typically derivatives and other structured products sensitive to changes in market rates. Over the past two years, the UK Financial Services Authority (FSA) has discussed the matter with a sample of banks and investment firms. This article sets out the main conclusions drawn from

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