Explanation:
The diagram illustrates the fact that while both past and present exposures are known with complete certainty, the future exposure is not certain. Rather, it’s subject to future market movements – which we can only estimate by use of probabilities. The grey area represents positive future exposure while the white area represents negative future exposure.
Things to Remember
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Q.1933 The diagram below illustrates past, current, and future exposure:
The diagram most likely illustrates the fact that:
A
both the current and future exposure are not known with certainty.
B
future exposure can be predicted from past and present exposure.
C
while current (and past) exposure is known with certainty, future exposure is largely uncertain and can only be defined by probabilistic estimates of future market movements.
D
while past exposure is known with certainty, current and future exposures are uncertain and subject to probabilistic estimates of future market movements.