Module 14 · Advanced
Counterparty exposure & PFE
When you trade a swap, there's no principal at risk — but there is a hidden danger: if your counterparty goes bust while the swap is worth money to you, you lose that value. That is counterparty exposure, and it changes every day as rates move.
Since we can't know the future, we simulateit — thousands of possible rate paths — and read the swap's positive value along each one. That gives two key measures over time: Expected Exposure (EE), the average amount you'd be owed, and Potential Future Exposure (PFE), a worst-case percentile (here 95%). The profile has a signature hump: exposure builds as rates have more time to drift, then falls back to zero as the swap runs off. This shape is how banks set counterparty limits and reserve capital.
🎛 Exposure simulator
Peak 95% PFE
$6,455,456
Peak expected exposure
$1,568,916
Avg (EPE)
$868,554
If your swap counterparty defaults, you lose whatever the swap is worth to you at that moment — your exposure. We can't know the future, so we simulate thousands of rate paths and read off two numbers over time: Expected Exposure (EE), the average, and Potential Future Exposure (PFE), a bad-case percentile (here 95%). The profile humps: exposure grows as rates have more time to drift, then collapses to zero as the swap runs off. Banks size counterparty limits and capital off this shape. Educational tool — not investment advice.
Things to try
- • Raise rate volatility — both EE and PFE swell (more uncertainty = more exposure).
- • Note the gap between the red PFE and the amber EE — that's the tail beyond the average.
- • Watch both curves return to zero at maturity — no time left for the swap to move.