Exposure At Default
Credit risk evaluation - banking
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