Potential Future Exposure and Expected Exposure: A Derivation
1. Context
In this swatch, for candidates who are interested in venturing into the math behind the formulas, we present a derivation of the Potential Future Exposure (PFE) and Expected Exposure (EE) formulas given in the prescribed reading. The assumption being made here is that the future value of the trade follows a normal distribution – a very analytically tractable assumption. The details of the reading in which this topic appears are given below:
| Area | Credit Risk Measurement and Management |
| Reading | Credit Exposure and Funding |
| Reference | Jon Gregory, Chapter 7. Credit Exposure and Funding In The xVA Challenge: Counterparty Credit Risk, Funding, Collateral, and Capital, 3rd Edition, (West Sussex, UK: John Wiley & Sons, 2015) |