CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 78.1% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
US English

What is potential future exposure?

Potential future exposure

Potential future exposure (PFE) is a measure of risk in relation to default by a counter-party to a financial transaction. It begins from the assumption that the transaction is proving beneficial to the party concerned and then calculates the potential loss should the counter-party default.

Where have you heard about potential future exposure?

You may have read last year that the Basel committee on bank regulation was looking at easing the rules on potential future exposure amid fears that the regulations can force banks to raise prices for customers or exit markets. The Bank of England supported this re-think.

PFE is an important measure in evaluating potential risks and, together with effective regulation, may have been able to identify the Black Swan trades that have been behind most major collapses of the past 30 years, including Enron, AIG and Lehman.

What you need to know about potential future exposure.

Potential future exposure is a measure of risk that has become of central importance to bank regulation since the financial crisis. It assesses the resilience of a bank's portfolio in relation to the danger of a counter-party defaulting on obligations such as a swap arrangement.

It is worked out by looking into the future, sometimes several years, and stating with a precise degree of confidence, perhaps 80 or 90 per cent, that at that point in the future, the bank will be looking at a gain, for example $5 million. Thus, the risk is that a default would cost the bank $5 million.

Related Terms

Latest video

Latest Articles

View all articles

Still looking for a broker you can trust?

Join the 610,000+ traders worldwide that chose to trade with

1. Create & verify your account 2. Make your first deposit 3. You’re all set. Start trading