Exposure limit
A limit may constrain a counterparty balance, currency position, maturity concentration or another specified measure. Define the basis, measurement time, responsible owner, monitoring and escalation for breaches. Limits operationalise risk appetite and capacity but do not guarantee that losses cannot exceed a stated amount: market moves, estimation error, liquidity or control failures can alter exposure. A well-designed limit also considers interactions and incentives so activity is not simply shifted into unmeasured categories. Review its suitability when conditions change.
Worked example
A treasury policy limits unsecured exposure to one counterparty to$2 million and requires escalation before additional transactions. A current$1.8 million balance may still need review if settlement or credit conditions change.
Common mistake
Treating an exposure limit as an insured maximum loss or assuming compliance with each individual limit proves acceptable aggregate risk.
Where it appears in your exams
| Qualification | Exam | Relationship | Period |
|---|---|---|---|
| ACCA | FM | Supporting | September 2026–June 2027 |