Exposure At Default: Difference between revisions

From ACT Wiki
Jump to navigationJump to search
imported>Doug Williamson
(Layout.)
imported>Doug Williamson
(Classify page.)
 
(3 intermediate revisions by the same user not shown)
Line 1: Line 1:
''Credit risk evaluation - banking''
''Credit risk evaluation - banking''.


(EAD).
(EAD).
Line 7: Line 7:
*Drawn balances; and
*Drawn balances; and
*Any undrawn amounts of commitments and contingent exposures.
*Any undrawn amounts of commitments and contingent exposures.
=====Exposure At Default for derivative contracts=====
The Exposure at Default (EAD) for a derivatives contract has two components:
*The current fair market value or replacement cost (RC); and
*The possible future increase in the market value over the remaining life of the contract.
This possible future increase is known as the Potential Future Exposure (PFE).
Considering both elements of the derivative contract EAD together:
EAD = RC + PFE




Line 13: Line 27:
*[[Expected Loss]]
*[[Expected Loss]]
*[[Loss Given Default]]
*[[Loss Given Default]]
*[[Potential Future Exposure]]
*[[Probability of Default]]
*[[Probability of Default]]
*[[Replacement cost]]
[[Category:Accounting,_tax_and_regulation]]
[[Category:Identify_and_assess_risks]]

Latest revision as of 20:41, 30 June 2022

Credit risk evaluation - banking.

(EAD).

Exposure At Default is an amount expected to be outstanding following a default by a counterparty, taking account of:

  • Any credit risk mitigation;
  • Drawn balances; and
  • Any undrawn amounts of commitments and contingent exposures.


Exposure At Default for derivative contracts

The Exposure at Default (EAD) for a derivatives contract has two components:

  • The current fair market value or replacement cost (RC); and
  • The possible future increase in the market value over the remaining life of the contract.


This possible future increase is known as the Potential Future Exposure (PFE).


Considering both elements of the derivative contract EAD together:

EAD = RC + PFE


See also