The average of positive exposure to a counterparty at a future date. Its average over time is used for pricing and capital.
Where you will meet it
Expected exposure comes up in 16 learning outcome notes across the FRM syllabus.
A few of them:
Credit Risk FRM Part II · Credit risk measurement and management
“Let R be the recovery rate, qi the probability of default in interval i and vi the present value of the expected positive exposure at that time.”
Credit Derivatives FRM Part II · Credit risk measurement and management
“Written out, the adjustment is CVA = LGD × Σ (probability the seller defaults in the period × expected positive exposure × discount factor).”
Derivatives FRM Part II · Credit risk measurement and management
“Exposure profiles then follow: expected exposure, expected positive exposure as the time average, and potential future exposure as a high percentile.”
Counterparty Risk and Beyond FRM Part II · Credit risk measurement and management
“In each period, DF is the discount factor, EPE the expected positive exposure and PD the marginal default probability, while LGD is the loss given default.”
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