What does Current Exposure Method -CEM mean?
A method to compute the cost of a default that may take place within a swap agreement. Banks and Financial Institutions use current exposure method to measure credit risk on a swap or other derivatives. It is a regulatory requirements under Basel.
Futures Knowledge Explains Current Exposure Method -CEM
According to Basel II norms, banks have to use the Current Exposure Method (CEM). This methodology has two components: the Current Exposure which is the current mark-to market value and a Potential Future Exposure that is the most probable amount of exposure expected to occur over the remaining life of the contract. This method is based on application of statistical tools.