Dear all, suppose a bank has a forward contract where to sell 1mn USD to buy 0.75mn EUR. In this case how to determine what is this bank's exposure amount? I really appreciate if somebody explains me.What could be the case if just opposite happens?Thanks,

is this a trick question ?

Trick question means? I was studying Futures/forward contract, and somehow this question came into my mind. However standard books like Hull perhaps does not have any direct answer on that.

You mean that the bank will sell 1 Mn USD by paying 0,75 M ? in a specified fututre date? If this is the case I think that the bank has exposure to both currencies ? and $ or what's the same to the ?:USD exchange rate. The bank will benefit if the euro depreciates respect to the dollar.

QuoteOriginally posted by: kindlyMeDear all, suppose a bank has a forward contract where to sell 1mn USD to buy 0.75mn EUR. In this case how to determine what is this bank's exposure amount? I really appreciate if somebody explains me.What could be the case if just opposite happens?Thanks,The easiest way to understand this is by acknowledging that currency forward are really swaps; you can formally derive this from the covered interest rate parity (it's really the other way around, but never mind). As in any swap, we have a long and a short leg; in your example, assuming virtually zero interest rate (which is pretty much a market reality nowadays) the bank loads a short and a long exposure: -1mn USD and +0.75mn EUR. If interest rates are not zero, you have to discount by the relevant money market rates. This is at inititation; if you determine the exposures at any points in time later, you have to consider changes in the spot rate as well as changes in interest rates.This is a rather basic question, it is not surprsing that some people in this forum don't think your question is real. Personnally, I am not surprised, because a lot of the textbooks used do not explain the economic meaning of derivative contracts because they are written by people with math beackgrounds (Hull, for example) or then from an accounting perspective.A long call option on a stock has legs too: a short cash position and a long position in the stock. The clue here is that the exposures depend on the delta of the option (see Black/Scholes).Another story are certain regulatory exposure calculations. I prefer not to comment on these in public. What I decribed above is the "economic exposure".Rgrds,Andi

Hi andste, can you provide me some more related forum for this sort of discussion? More importantly, I need some more expert discussion forum for "Portfolio Attribution" I have somewhat feeling that Wilmott forum may not be the best place for this kind of discussion Thanks,

HiExposure is always reported in domestic currency.For example for European bank Domestic currency is Euro whereas for US based bank domestic currency is USD.Thus exposure calculation would be different if you are European bank Vs.US based bank.Regards,