Exposure Calculations
The document discusses the concept of exposure in investment portfolios and explains how to calculate and manage exposure effectively. Exposure refers to the level of investment in a specific asset or market sector within a portfolio. Managing exposure involves carefully selecting assets and determining their allocation to achieve diversification and reduce risk. The document highlights that calculating exposure is straightforward for plain equities, where it is the product of the price and quantity held in the account. However, it becomes more complex when dealing with options positions. In addition to the price and quantity, the delta of the option (which can be positive or negative) needs to be considered for accurate exposure calculation. The net exposure is determined by adding up all the exposures in the portfolio. The document also explains the difference between net exposure and gross exposure in a long/short portfolio. Gross exposure is the sum of the absolute values of all exposures, while net exposure considers the sum without taking absolute values into account. It emphasizes that calculating gross exposure is crucial due to potential basis risk between positions held in the portfolio and the leverage involved. Understanding gross exposure helps manage risk effectively. Overall, the document provides insights into exposure management and highlights the importance of diversification, accurate calculation of exposure, and considering both net and gross exposure in portfolio analysis.
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