What does Expected Positive Exposure (EPE) calculate?

Expected Positive Exposure (EPE) specifically measures the average positive exposure that a financial institution has at a given time over a specified time horizon. It is a key metric in counterparty credit risk management and reflects the potential future credit exposure that could arise from fluctuations in the value of derivatives and other financial instruments.

EPE focuses on the times during which the exposure is positive, thus providing an average, rather than looking at the total net present value of cash flows or the total collateral required, which would not accurately represent the risk profile from a credit exposure perspective. Moreover, it does not relate to the delinquency rate on receivables, as EPE is geared towards assessing the potential risk from derivative trading activities rather than collections or cash flows from accounts receivable. This makes the average positive exposure over a specified time the correct interpretation of what EPE calculates.