Exposure

The Exposure measures how much money is actually subject to the price variation of a position. For most securities, it is equal to the market value: someone holding BRL 10,000.00 in stocks is exposed to BRL 10,000.00 of price variation.

Derivatives, such as futures and forward contracts, are different. With them, the investor does not pay the full value of the contract, but is exposed to price variations over that full value. That is what enables leverage: with little (or no) allocated capital, it is possible to have an exposure much larger than the portfolio's wealth. That is why GorilaCORE allows some indicators to be analyzed from two perspectives: wealth and exposure.

Wealth vs. exposure

• Wealth perspective (market value): for securities in general, a position's value is the quantity multiplied by the closing price. For futures and forwards, however, the market value is zero: the daily gains and losses of these contracts flow into the portfolio's Profit & Loss, but the contract itself does not add value to the portfolio's wealth.
• Exposure perspective: a position's exposure is the quantity multiplied by the closing price and by the contract multiplier. It is signed: short positions have negative exposure.

$$\text{Exposure} = \text{Quantity} \times \text{Closing price} \times \text{Contract multiplier}$$

For securities that are neither futures nor forwards, including options, the exposure is equal to the market value. The difference between the two perspectives therefore only shows up in futures (FUTURES) and forward (FORWARD_STOCK and other forward types) positions.

Example

A long position of 10 index futures contracts, with a closing price of BRL 21,515.59 and a multiplier of 2.5, has:

Perspective	Position value
Wealth (market value)	BRL 0.00
Exposure	10 × BRL 21,515.59 × 2.5 = BRL 537,889.75

If on the next trading day the contract yields a gain of BRL 13,766.34, the day's return from the exposure perspective is BRL 13,766.34 ÷ BRL 537,889.75 ≈ 2.56%. From the wealth perspective, there would be no value to calculate that return on.

The marketValueType parameter

The endpoints below have an optional parameter called marketValueType, which defines the perspective used in the calculation:

• Return (TWR): Read Time-Weighted Return and List Position Time-Weighted Returns
• Net Asset Value (NAV): Read Net Asset Value
• Market value: List Position Market Values
• The economic group version of each of them: Read Economic Group Time-Weighted Return, List Economic Group Positions Time-Weighted Returns, Read Economic Group Net Asset Value and List Economic Group Positions Market Values

The parameter accepts two values:

• AUTO (default)

  • Return: calculated from the wealth perspective, unless the queried grouping contains only futures and forwards. In that case, the return is calculated from the exposure perspective. For example, a portfolio made up only of futures has no wealth to calculate the return on (there would be no denominator), so the return is calculated over the exposure. In a portfolio (or grouping) with at least one position other than futures or forwards, the return can be calculated from the wealth perspective, and that is what is returned, even in a highly leveraged scenario through futures.
  • Return per position: in the per-position breakdown, each position is evaluated on its own. Therefore, the return of a futures or forward position is always calculated over its exposure.
  • NAV and market value: always calculated from the wealth perspective. Futures and forward positions show a zero market value, even when the grouping contains only these contracts.

• EXPOSURE

  • Return: always calculated from the exposure perspective. For securities that are neither futures nor forwards, the result is practically the same as from the wealth perspective, since their exposure equals their market value. For futures and forwards, the return is measured over the full value of the contracts.
  • NAV and market value: they add up the positions' exposure, that is, futures and forwards contribute the full value of the contracts (signed) instead of zero.

How the perspective affects the return

The TWR is compounded from a daily factor, calculated as the day's profit or loss divided by a base:

$$\text{Daily factor} = 1 + \frac{\text{Day's P\&L}}{\text{Base}}$$

From the wealth perspective, the base is the portfolio's market value at the opening of the day. From the exposure perspective, the base is the exposure at the opening of the day. In leveraged portfolios, the exposure is larger than the wealth, so the return from the exposure perspective tends to be smaller in absolute terms.

Consider a portfolio with BRL 100,000.00 in stocks and a long futures position with an exposure of BRL 200,000.00 (for simplicity, ignore cash). On a day when the stocks earn BRL 1,000.00 and the futures earn BRL 2,000.00, the day's total profit is BRL 3,000.00:

Perspective	Base	Day's return
Wealth (AUTO)	BRL 100,000.00 (the futures' market value is zero)	3.0%
Exposure (EXPOSURE)	BRL 300,000.00 (stocks + futures exposure)	1.0%

The wealth perspective answers the question "how much did my capital yield?", while the exposure perspective answers "how much did each real exposed to the market yield?".

Other indicators

The drawdown, the volatility and the Sharpe ratio do not have the marketValueType parameter. They are calculated over the same return series and always follow the AUTO rule.