Exercise Solution 1.5

Many solutions are possible. Here are two possible answers for each of the three items:

Exposure

• Delta quantifies exposure to the value of an underlier.
• Duration quantifies exposure to shifts in a yield curve.

Uncertainty

• Standard deviation of a commodity’s spot price quantifies uncertainty.
• Probability of default quantifies uncertainty.

Uncertainty combined with exposure

• Variance of a portfolio’s return quantifies uncertainty combined with exposure.
• Expected credit loss quantifies uncertainty combined with exposure.