Exposure
Family III · Risk
Not to be confused with leverage, position size, margin.
Exposure is the amount of value that a position or portfolio can gain or lose as prices move. It is not the same as the cash committed: a leveraged position carries exposure far larger than the margin deposited to open it. Exposure can be measured per instrument, per market, per currency, or across an entire account.
How exposure is measured
For a cash position, exposure is the number of units held multiplied by the current market price. For a derivative, exposure is usually expressed as notional value: the contract size multiplied by the underlying price, adjusted for the contract multiplier. A short position has negative exposure, meaning gains accrue as the price falls.
Exposure is often broken down by dimension:
- Directional exposure — net long or short value in a single instrument.
- Currency exposure — value denominated in a foreign currency, which moves with the exchange rate as well as the asset price.
- Sector or asset-class exposure — aggregate value concentrated in one group of correlated instruments.
Margin requirements and position limits are typically set by reference to exposure, not to the cash deposited, and the exact ratios vary by broker, instrument and regulator.
Worked example
The position controls 20,000 of stock with 4,000 of capital. A 10% adverse move costs 2,000, which is half the margin, so the leverage multiplies the effect of the price change on the account.
Exposure versus risk
Exposure is a quantity; risk is the possibility and size of loss arising from it. Two positions with identical exposure can carry different risk if their volatility, correlation with other holdings, or time to expiry differ. A common error is to treat gross exposure as a complete risk measure: offsetting long and short positions may reduce net exposure while leaving basis, liquidity and gap risk intact.
Often confused with
- leverage
- Leverage is the ratio of a position's notional value to the capital committed to it, allowing a trader to control a larger exposure than the account balance alone would permit.
- position size
- Position size is the quantity of an asset or contract held in a single trade, expressed in units, lots, or notional value, and determined by the trader's risk tolerance and stop-loss distance.
- margin
- Margin is the collateral a trader must deposit and keep with a broker to open and maintain a leveraged position, calculated as a percentage of the position's notional value.