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Gross exposure

The sum of absolute exposures defined in one unit. It describes scale before offsets but is not, by itself, committed capital, economic leverage or loss risk.

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Who this is for — Anyone who wants to see position scale before long and short amounts offset, while keeping the chosen convention explicit.

Gross exposure sums the absolute values of exposures Eᵢ expressed in the same economic unit:

G = ∑ᵢ |Eᵢ|; G / NAV = ∑ᵢ |Eᵢ| / NAV

It may be calculated on market value, notional, beta-adjusted notional, delta equivalent, DV01 or another sensitivity. The measure's name must travel with the number: “gross notional” and “gross DV01” are not two labels for the same thing.

Exposure: the same positions, three different readings Perimeter, unit and sign convention come before the number Exposure: the same positions, three different readings Perimeter, unit and sign convention come before the number POSITIONS IN SCOPE Long A +120 signed value under the chosen… Short B −80 signed value in the same unit 1 Exposure quantity × price / sensitivity A relationship to a price,factor or entity; it depends oninstrument and unit. 2 Gross exposure |+120| + |−80| = 200 Sum of absolute values: scalebefore offsetting. 3 Net exposure +120 − 80 = +40 Algebraic sum: residualdirection within the chosenperimeter. ≠ SMALL NET ≠ SMALL RISK Basis, options, currency, liquidity and counterparty exposures may remaineven when long and short positions offset. Cyclepedia · source-checked visual explainer
Gross exposure preserves the scale of both sides before offsetting.

What it shows and what it does not

Gross exposure can show Gross exposure alone does not show
scale before offsets maximum loss or a loss distribution
balance-sheet or notional growth capital actually posted as margin
reliance on many open positions sensitivity if the basis is only notional
data and operational-control burden liquidity, gaps, basis or counterparty risk

In a cash portfolio expressed in one currency, long 120 and short 80 produce gross exposure of 200 and net exposure of +40. Those two numbers do not imply market neutrality, a particular volatility or a possible loss of 200; the instruments, factors, payoffs and scenarios are still needed.

There are no universal percentage bands for gross exposure. The same ratio can mean different things for a cash portfolio, a margined future, an option spread or a swap. Limits and escalation depend on mandate, liquidity, concentration, collateral and revaluation capacity.

Derivatives and cross-asset comparisons

Gross notional is useful for contractual scale and reconciliation, but it can over- or understate economic sensitivity. An option's local exposure also depends on delta and changes with the market; a bond or swap's rate exposure needs duration or DV01; instruments in different currencies need coherent FX conversion.

When a common conversion would mislead, retain separate buckets by asset class and factor instead of manufacturing one total. Legal counterparty offsets also follow contracts and netting sets; they do not arise from merely adding long and short positions.

Common mistake — Calling gross exposure “capital in the market” or “real risk”. It is an analyst-defined exposure measure; margin, NAV, sensitivity and scenario loss remain separate.

Checklist

  1. State basis, sign, currency, NAV and measurement time.
  2. Apply contract specifications and multipliers before aggregation.
  3. Do not add notional, delta, beta and DV01 in one column.
  4. Display gross and net together, then connect both to sensitivities and scenarios.
  5. Reconcile collateral and legal netting separately from market exposure.

Sources

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