investment-channel

Exposure to any investment channel includes investment in equities directly and through financial instruments (such as: futures contracts, options, ETNs, mutual funds, and so forth).

Holding value denotes the monetary value of the financial instrument (according to its market price) and does not include the financial leverage of that instrument

Holding rate denotes the value of the holding in percentage.

Exposure value denotes the monetary value of the exposure rate.

Exposure rate denotes the inherent correlation between the exposure created in the base asset and the actual holding.  (It should be clarified that the holding rate is not necessarily the same as the exposure rate).

When investing directly in an equity, the holding value and the exposure value are the same.

In contrast, when investing in an equity channel through a financial instrument, the holding value will differ from the exposure value, and is dependent on the leverage level of the financial instrument.  The higher the leverage is, the larger the difference between the holding value and the exposure value will be.

If we examine the investment in terms of the holding only, we may get an imprecise picture of the volume of risk in the portfolio, since the holding rate does not include the financial leverage that exists in financial instruments.

An example of the difference between the holding rate and the exposure rate:

In a fund on the S&P 500, the fund manager invests in equities through a financial instrument (options with a leverage of 12).  A direct result of this is that the holding rate in equities will be 10 percent (the monetary value of the options) compared with an exposure rate of 120 percent (10% x 12) for that equities index including the financial leverage.

Dual exposure:

In addition, it should be emphasized that the exposure rate, as opposed to the holding (which totals 100 percent) can be lower or higher than 100 percent.  When calculating the exposure rate, on certain assets, there is a double count.  This means that that asset will be expressed as both equities or corporate bonds and foreign exchange.  For example, an equity traded abroad will be expressed on both the “equities” channel” and on the “foreign exchange” channel.  Therefore, when examining the investment portfolio in terms of the actual exposure rate, the result may be higher than 100 percent.