Build the exposure from positions and operating causes

Begin with the positions and operating plan that generate the outcome. FDM.1–3 recover who holds each claim or obligation, which entity can use a resource, and how actual terms turn events into changed amounts or duties. FIN.4 supplies the projected flows and balances. Retain the part of those accounts needed to explain the present consequence.

For a foreign receipt, recover the currency of the amount actually owed, its amount or amount-setting rule, due date, plausible collection dates and evidence for expected collection. A sale described as “overseas” may be invoiced in home currency, yet still have operating exposure because customers, competitors or imported inputs respond to exchange rates. Conversely, a foreign-currency invoice gives a transaction exposure even if the seller has no foreign subsidiary. A consolidated translation amount is another possible reporting exposure; it is not automatically a remittable balance.

For interest, follow outstanding principal, reset dates, reference definitions, spread changes, floors, caps and accrual conventions. A shock after a coupon has already been fixed can affect later coupons without changing that first payment. For commodity-linked activity, follow physical quantities, the price reference, local basis or quality adjustment, contractual pass-through and the date on which the price becomes fixed. Include the operating response where price changes alter demand, sourcing or output. A price sensitivity holding quantity constant answers a narrower question than a forecast allowing those responses.

Trace the routes through which non-market events change the same account. A customer delay changes cash timing even when the claim remains valid. A default may change both expected recovery and the time to obtain it. A counterparty can owe a favorable derivative payment just when it becomes least able to pay. A financing line can become less drawable when collateral loses value. These effects belong in the scenario that produces them; listing credit and liquidity risks separately is insufficient if the proposed offset relies on both counterparties performing together.

A compact working account can therefore identify, for each material contribution, its party and position, amount-setting factors, performance conditions, relevant dates, outcome affected and existing protection. That is enough when it permits reconstruction of the calculation. When an input is disputed, return to the actual source account or specialist contribution rather than hide the uncertainty in a general risk allowance.