Potential future exposure (PFE) is a measure of counterparty credit risk. It is the maximum loss with a given confidence or probability should the counterparty default. For example a 95% PFE of $1,000,000 should be interpreted as: "Assuming no further trading, if this counterparty should default at any time in the future there is a 95% chance that the loss due to default will be less than 1 million dollars".
 
Banks depend on PFE to monitor and limit potential losses on their derivative portfolios, ideally measuring the change in PFE and effect on limits of a new trade prior to trading. PFE is most accurately measured with Monte Carlo simulation, where many possible future scenarios are evaluated and the results sorted to find the value on the confidence interval. Risk mitigation in the form of netting and collateral agreements must also be taken into account to measure PFE correctly.