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WHITEBOARD: Exposure -- not necessarily a bad thing

Most people have dark thoughts when they hear the word exposure, but exposure can be beneficial -- if it's done in moderation, as I explain in this latest Whiteboard.

When I hear the word exposure, I don't think good thoughts. To most of us, exposure means you've got hypothermia. That means you're essentially freezing to death, so it's a rather unfortunate choice of words. Because exposure isn't necessarily a bad thing.

If you ever go out in the sun, you'll know what I mean. The sun is a great source of Vitamin D, and a great source of good feeling for most of us. You want to keep the sun off your face, but a nice daily dose of sunshine on your arms and legs is really good for you.
However, if you stay out too long, you'll get burned. But to paraphrase, it's not the sun that burns people -- it's overexposure to the sun that burns people.

So what does that have to do with Greek government debt, you ask?

Well, Greek debt is a bit like the sun. And just like the sun, you only want to be a little exposed. In other words, you want to own just a little Greek debt -- because owing too much can be really bad for your financial health. There may be some good reasons to buy Greek debt -- the interest rate could be terrific, there may even be a guarantee! But if you have 75 percent of your portfolio in Greek debt, you're overexposed: You own too much, in other words, because if things go wrong and Greek debt turns out to be worthless, your portfolio will be worth next to nothing.

And that will leave you, and everyone around you, badly needing a drink.

About the author

Paddy Hirsch is a Senior Editor at Marketplace and the creator and host of the Marketplace Whiteboard. Follow Paddy on Twitter @paddyhirsch and on facebook at www.facebook.com/paddyhirsch101
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What was that??

You basically defined the word exposure, dictionary.com does that.

I thought you would go in and explain how options and derivatives provide exposure but how if used correctly can actually add value - why do the current conditions make the word negative (give an example).

Sorry if I am expecting too much, have a good day.

It's not the current conditions that make the word "exposure" negative; it's always seen as a bad thing, in the public view
Here's the dictionary dot com definition of exposure:

a prominent, often overextended position or commitment, as in investment, that is considered precarious and risky: The bank was nervous about its exposure in Iran.

Whereas in the investment world, in fact, exposure is not necessarily a negative term at all.

As for options and derivatives, exposure to them is just like exposure to anything else: small amounts add value because they can make you money or hedge you against another investment. Too much exposure and you are taking a big risk, if the market moves against you. Just like Greek bonds.

Yes, nice, very easy to understand from the BANKS point of view. Let's not forget, they are in business to make money ANYWAY they can. THEY take RISKS with YOUR'S and MY deposits. That risk is not what WE depositers signed up for. WE are enabling these gamblers and we need to move our deposits to credit unions so these rascals will stop gambling and go back to the sound business of lending so predictable, stable growth will occur for the good of society and not for their HUGE and GLUTTONOUS BONUSES. This culture of greed is not sustainable and must stop. You only need look at how enormous wealth in the finance industry for the few has skewed the whole distribution of earnings for all of us. We can go back to sound practices but you need to contact your elected officials and tell them that they will end up as history if they enable the culture of greed by getting into bed with the financial whores. That is what a big part of the Occupy Movement is all about. THE CULTURE OF WORLDWIDE GREED MUST STOP.

Delightful explanation by analogy. Very clear. Very fun! I'm going to watch more of these whiteboard summaries! Thank you.

I agree. I haven't seen these white board explanations recently. I always learned from the ones I have seen. They are well done. Thank you.

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