The amount of future CREDIT RISK inherent in an OVERTHECOUNTER DERIVATIVE transaction, typically combined with ACTUAL EXPOSURE to determine total credit exposure. The amount of fractional exposure in a derivative is dependent on market movements in the UNDERLYING reference: the greater the potential future market moves, the greater the fractional exposure. Fractional exposure, which can be estimated through statistical or simulation methods, is positive at the inception of a transaction and declines as maturity approaches, since the opportunity for further market moves that can affect value becomes limited. Also known as DEEMED RISK, POTENTIAL MARKET RISK, PRESETTLEMENT RISK, TIMETODECAY RISK.
What is FRACTIONAL EXPOSURE?
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