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A. Current Credit Exposure
A bank dealer’s current credit exposure on any day was the
net present value of the amount that the bank expected to receive
under a swap agreement as ascertained from current interest rate
projections. In other words, a bank’s current credit exposure
was the midmarket value of a swap, to the extent that the
midmarket value was positive.
B. Potential Credit Exposure
A bank dealer’s potential credit exposure was the most that
it could lose on a swap. Although it was possible to ascertain
the amount that a bank would lose if interest rates reached
unthought-of heights such as 20 percent or higher (or, in other
words, a bank’s “maximum exposure”), banks generally did not
consider their maximum exposure because they did not believe that
interest rates would rise to those unexpected levels. The
concept of potential credit exposure was reformulated to measure
the most that a bank could lose with a set level of confidence
(e.g., a 95-percent certainty). The degree of conservatism
increased with an increase in the number used as the confidence
level; e.g., the use of a 20-percent confidence level was less
conservative than the use of a 50-percent confidence level.
The G-30 report recommended that potential credit exposure
be calculated using broad confidence intervals (e.g., two
standard deviations) over the remaining terms of the
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