Exposure At Default

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.

EAD for derivative contracts

The 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 EAD together:

EAD = RC + PFE

See also

• Default
• Expected Loss
• Loss Given Default
• Potential Future Exposure
• Probability of Default
• Replacement cost