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The expected loss equals PD * LGD * EAD, meaning probability of default times loss given default times exposure at default.

I get how we can get PD and LGD, but what is the exposure at default (EAD) and how is it supposed to be calculated for different instruments?

For example, take a bond. The bond has a CURRENT exposure (= the value of the bond). But if the probability of default is, say, 5 % per annum, that default could occur 12 months from now or 6 months from now or 3 months from now ... we don't know. And the exposure of the bond could be different at each of those time points.

So how can we possibly calculate exposure at default using probability of default? It seems to me that we lack information here: we need to know WHEN the default occurs, AND we need to know what the exposure is AT THAT TIME (which may not be obvious...).

Or am I overthinking it, and EAD = current exposure?

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