What is meant by credit exposure?

Credit exposure refers to the total amount of credit that a lender has extended to a borrower, which represents the potential risk of financial loss due to the borrower's failure to repay the loan. This concept is crucial in risk management, as it helps financial institutions assess and manage the risks associated with lending.

When a lender determines their credit exposure, they evaluate the outstanding amount of credit provided, including any current loans or credit lines. This understanding allows the lender to estimate potential losses and make informed decisions about risk mitigation strategies, such as setting appropriate interest rates, requiring collateral, or adjusting credit limits.

In contrast, the other choices focus on different aspects of finance that do not define credit exposure. The total amount of equity held by a borrower relates to their ownership stake and overall financial standing, while a measure of a lender's total capital pertains to the lender's financial health rather than their exposure to a specific borrower's risk. Furthermore, the interest rate on a loan is a cost incurred by the borrower for borrowing money and does not directly address the concept of credit exposure itself.