Applied risk management series: Counterparty risk exposure metrics

The use of static counterparty exposure metrics, which provide an incomplete view of the risk of individual deals and portfolios, may lead risk managers to take decisions with unintended consequences. Carlos Blanco outlines a better approach using forward-looking metrics, such as potential future exposure

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