Exposed!
Research Paper
June 1, 2006
Preview
Exposure is perhaps the most frustratingly ambiguous term that we ever encounter, frustrating in part because of its ambiguity, but even more so because of the lack of appreciation for its ambiguity. In this piece, we attempt to clarify the three main notions of financial or risk exposure: sensitivity, leverage, and credit. We discuss each of these notions, and emphasize that while the definition of exposure in each context may be obvious in simple cases, it is not so when we consider collections of positions. We are then faced with the choice of generalizing the definition, accepting a flawed measure, or abandoning exposure altogether in favor of answering our true question, which is usually about risk.
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