#### Exposure

Exposure is the sensitivity of the value of a trade, or a portfolio, to some market variable

A single trade may have Exposure to multiple market variables, and we measure the Exposure to each variable separately.

In general there is an Exposure to each independent market variable that determines the value of the trade

Detail

Consider a simple Physical fixed price Forward delivering in a year's time

There is an Exposure to the commodity underlier, let's say a Coal value

The Exposure is the shift in value of the trade with each unit shift in the price (or value) of the underlier

So a trade to buy 100 tonnes of coal might shift by $1 per tonne, for each shift of$1 per tonne in the price of coal, the 100 tonnes Exposure is 100

100 whats?

Let's look at the units. We want the shift in price = 100 tonnes * $1 per tonne =$100, per unit shift in the price of coal = $100 /$1 / tonne = 100 tonnes

So the Exposure has units of the underlier!

If you've looked at the definition of Delta you will have seen that Delta is properly the change in value per unit of the trade per change in value per unit of the underlier

So we get the important formula Exposure = Position * Delta

A trade may have multiple deltas and multiple Exposures - our simple Forward deal may not be as simple as we think:

• There is a Delta and Exposure to the value of coal
• If we want to know the current value of the trade then there is a Delta and Exposure to the interest rate
• If we are a European trading organization and we want to know the value of our trade in Euros then there is a Delta and an Exposure to the FX rate between Dollars and Euros - the FX Exposure

Exposures are additive - they can be summed across a set of trades or portfolios

Deltas are not additive - because they are dimensionless ratios