Posted in Finance, Accounting and Economics Terms, Total Reads: 704
Definition: Credit Exposure
Credit exposure is the maximum amount that will be lost if the counter party to that contract defaults. Thus a total amount of money that is being extended by a lender to the borrower is the credit exposure for that lender. Credit exposure is an alternate name for credit risk as the magnitude of credit exposure signifies the amount of loss that the lender is exposed to in case the borrower defaults.
For example, if a bank has extended a loan of Rs. 100 Million to a company X, then the bank’s credit exposure to company X is Rs. 100 million.
This Credit exposure can be hedged by using credit default swap or other similar types of financial instruments. Also while calculating credit exposure we consider not only the current credit exposure of the contract but also the potential changes in the contract that may occur due to some uncertain event during the life of the contract.
Amount of credit exposure that a lender wants also depends on the credit rating of the borrower. Thus bank will seek to have a higher risk exposure to a higher credit rating customer and less exposure for a lower credit rating customer.