Exposure At Default: Difference between revisions
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imported>Doug Williamson (Mend link.) |
imported>Doug Williamson (Classify page.) |
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''Credit risk evaluation - banking'' | ''Credit risk evaluation - banking''. | ||
(EAD). | (EAD). | ||
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===== | =====Exposure At Default for derivative contracts===== | ||
The EAD for a derivatives contract has two components: | The Exposure at Default (EAD) for a derivatives contract has two components: | ||
*The current fair market value or replacement cost (RC); and | *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. | *The possible future increase in the market value over the remaining life of the contract. | ||
| Line 18: | Line 18: | ||
Considering both elements of the EAD together: | Considering both elements of the derivative contract EAD together: | ||
EAD = RC + PFE | EAD = RC + PFE | ||
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*[[Probability of Default]] | *[[Probability of Default]] | ||
*[[Replacement cost]] | *[[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
