What counterparty risk taught me about project risk management
In counterparty risk, explained to a developer, I framed EAD, PFE and CVA as an external dependency problem. Since my Digital Transformation Strategist MBA at École Polytechnique, I've noticed these three metrics also map, almost term for term, onto how project risk usually gets mismanaged.
The classic mistake: measuring EAD, never PFE#
A project risk register almost always looks like a snapshot at time T: probability, impact, status. That's an EAD, an exposure measured today. What's missing is the PFE, the possible trajectory of that exposure over time. A single-person dependency on someone who understands a legacy system is small early in a project; it grows mechanically as other teams build on top of it. A register that doesn't revisit its risks at that pace treats a PFE as an EAD, and discovers the real size of the exposure at the worst possible moment.
Wrong-way risk: when exposure and probability rise together#
In market finance, wrong-way risk is an exposure that grows exactly as the counterparty's probability of default grows: the worst of both worlds. A project has its own wrong-way risk: the cheapest vendor, picked after a tight budget arbitration, is often also the one with the least room to absorb a market slowdown. The person who alone holds the knowledge of a critical component is also the most likely to leave when the project turns stressful, underfunded, or unrecognized. These correlations don't show up in a register that treats each risk as independent from the others.
CVA: an unpriced risk isn't a managed risk#
CVA converts an uncertain future risk into a present cost, provisioned today. That's the discipline most missing from project steering committees: a risk documented without an associated contingency budget isn't managed, it's just hoped away. Pricing a risk, even roughly, changes the conversation: instead of "we'll deal with it if it happens," you're discussing an explicit contingency budget, arbitrated like any other line item in the project.
What this changes in practice#
Presenting a project risk to a steering committee with this vocabulary, current exposure, possible trajectory, correlations, provisioned cost, changes the nature of the exchange: it stops being a list of technical worries loosely translated, and becomes a calculation any executive already knows how to read, because it's the one used to steer a financial risk portfolio for decades.
