# EAD = Drawn amount + Undrawn amount * CCF?

I am pretty sure the following is true $$\text{EAD} = \text{Drawn Amount} + \text{Undrawn Amount} \times CCF$$ where $$\text{CCF}$$ is the credit conversion factor. It means if an overdraft line is drawn to 500 EUR & its limit is 1000 EUR with CCF = 0.5, EAD is 750 EUR.

Unfortunately, I have a really hard time finding a reference for that.

Is there any Basel paper or similar which shows that the equation above holds or possibly an alternative version if my formula is incorrect?

## 1 Answer

Your equation is right. There are 2 ways to write EAD:

1. EAD = Drawn + a x Undrawn; or
2. EAD = a x Limit.

In both equations, a is called CCF but it is derived/estimated differently depending on which equation you use.

You can refer to the paper "EAD Estimates for Facilities with Explicit Limit" by Moral.

• Thanks @nyk. To conclude, there is no industry standard and both can be possible. – PalimPalim Oct 19 '20 at 13:22
• @PalimPalim Theoretically there is no difference between the 2 equations. In practice, corporate/commercial product guys would prefer your version since undrawn, which could be referred to as "headroom", is explicitly included in the equation. – nyk Oct 20 '20 at 0:12
• but using my example numbers first equation: 500 + 500 * 0.5 = 750 and 2nd equation 1000 * 0.5 = 500. What am I missing here? and here are ccfs bis.org/bcbs/publ/d424_hlsummary.pdf so which equation shall I use here? – PalimPalim Oct 20 '20 at 11:09
• As mentioned, in both equations, the "parameters" are called CCF but they are derived/estimated differently. Probably the example you chose confused you. If you look carefully, the CCF in your example is a percentage/fraction of undrawn, which turns out to be [fortunately/unfortunately] 50%. When you applied this value of CCF in the second equation of course it won't work. – nyk Oct 22 '20 at 0:33
• Thanks @nyk. The paper states that the first version here, 2nd version in the paper is the one applied by Basel and hence the one which is relevant for me. – PalimPalim Oct 23 '20 at 7:20