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What Is Aggregate Risk?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 14 December 2018
  • Copyright Protected:
    2003-2018
    Conjecture Corporation
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"Aggregate risk" is a term used to describe the degree of exposure that an investor or institution takes on in order to participate in some type of transaction. This term is most commonly employed to describe the cumulative risk involved with investments that have to do with currency trading on the foreign exchange market. Assessing the aggregate risk associated with any type of transaction or investment can make it easier for the investor to determine if the effort is likely to generate rewards that are in line with the potential risk and then decide whether to move forward with the opportunity or abandon it in favor of some other type of investment.

As it relates to trading on the foreign exchange market, assessing aggregate risk will involve careful consideration of all factors that could lower or even eliminate earning a return from the effort. To this end, the investor will seek to understand what is behind the current fluctuations of exchange rates between two or more currencies. From there, the task will focus on determining how long those circumstances will continue to exert some influence over those movements, then structuring currency trades in a manner that is likely to keep the risk as low as possible while maximizing the chance for earning returns.

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Aggregate risk is also found with various types of lending situations. Banks and other types of lending institutions may look very closely at the potential for some sort of adverse exposure associated with a loan involving offshore parties. Here, the interest in the rate of exchange is important, since an adverse rate could mean that the bank ends up losing money on the loan due to shifts in that exchange rate. The aggregate risk will also require considering the potential exposure at default, meaning that if that borrower should default on the loan at a point when the exchange rate is particularly undesirable, there is a chance the bank would lose even more money from the venture.

In some cases, banks and individual investors will attempt to minimize the aggregate risk by including certain provisions in the purchase or loan contracts. For example, a bank may require that payments on the loan are tendered in a specific currency if the exchange rates between two or more acceptable currencies fall below a certain level. Even with efforts to keep the degree of aggregate risk minimal, there is a good chance that at least a small amount of risk will remain.

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