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Default Exposure
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The loss that would be incurred by a market participant if its counterparty defaulted. Default exposure is often measured using Monte Carlo techniques. Typically, the case associated with the 95% probability limit is defined, somewhat arbitrarily, as the 'maximum default exposure.' To complicate any loss calculation or estimate further, a default usually will reduce the market value of an instrument but will rarely reduce it to zero within a short period. See also Default Risk (2).
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