Exposure At Default
From Open Risk Manual
Definition
Exposure At Default (EAD) denotes the amount that is at risk if a client or counterparty defaults on a credit obligation. That amount may be certain (known in advance) or uncertain and subject to various drivers, factors that determine. EAD is a type of Risk Metric that has become prominent since the introduction of the Basel II framework where it plays the role of one the key Risk Parameters used to determine capital requirements
Notation
The i-th exposure at default at period k is denoted as , simplifying to when exposure is fixed in time.
Uncertainty Drivers
For credit products with uncertain exposure amounts the risk drivers are typically one of the two following:
- Utilisation rates of a credit limit for revolving credit products (lines of credit).
- Market factors for derivatives counterparty exposures.
Issues and Challenges
- Quantification of both above mentioned risk drivers is quite difficult for corporate counterparties given the relative scarcity of credit events
