Portfolio exposure and stress scenarios

Prerequisite: Size the risk before the position

On a small screen, scroll the figure sideways or open it full size.

Learning objective

Aggregate planned losses and identify common drivers across positions.

The number of open positions is not a measure of diversification. Several trades may depend on the same currency, sector, rate outlook or risk sentiment. Build an exposure map that records instrument, direction, notional value, account-currency conversion and the scenario that would hurt it.

Adding planned stop losses gives a simple simultaneous-stop scenario, not a guaranteed worst case. Gaps, financing, changing correlations and execution failures can increase losses. Offsetting notionals are not necessarily hedges if timing, instruments or contract behaviour differ.

Stress tests deliberately ask what happens under adverse moves rather than estimate how often they occur. Consider a shared-currency shock, spread widening and delayed exits together. Clearly label hypothetical assumptions and compare several severities; a precise spreadsheet can still rest on very uncertain inputs.

Common mistakes

Do not reduce exposure estimates merely because historical correlations look favourable. Diversification can reduce some risks but cannot eliminate loss.

Practice

Map five hypothetical trades by currency and common macro driver. Calculate all-stops loss and one gap scenario in the same account currency.

Sources & further reading

• Investor.gov — Asset Allocation and Diversification
• CME Group — Position and Risk Management