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    Expected Loss

    Uploaded by

    Muhammad Rizwan Virk
    The expected loss (EL) is the amount an institution expects to lose on a credit exposure over a time horizon. EL is calculated as PD x LGD x EAD x M, where PD is the probability of default, LGD is the loss given default, EAD is the exposure at default, and M is the effective maturity. The expected loss for a portfolio is the sum of the individual expected losses if we ignore correlation between the LGD, EAD, and default event variables. The document then defines each component of the EL calculation.

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    Expected Loss

    Uploaded by

    Muhammad Rizwan Virk
    24 views2 pages
    The expected loss (EL) is the amount an institution expects to lose on a credit exposure over a time horizon. EL is calculated as PD x LGD x EAD x M, where PD is the probability of default, LGD is the loss given default, EAD is the exposure at default, and M is the effective maturity. The expected loss for a portfolio is the sum of the individual expected losses if we ignore correlation between the LGD, EAD, and default event variables. The document then defines each component of the EL calculation.

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    The expected loss (EL) is the amount an institution expects to lose on a credit exposure over a time horizon. EL is calculated as PD x LGD x EAD x M, where PD is the probability of default, LGD is the loss given default, EAD is the exposure at default, and M is the effective maturity. The expected loss for a portfolio is the sum of the individual expected losses if we ignore correlation between the LGD, EAD, and default event variables. The document then defines each component of the EL calculation.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    24 views2 pages

    Expected Loss

    Uploaded by

    Muhammad Rizwan Virk
    The expected loss (EL) is the amount an institution expects to lose on a credit exposure over a time horizon. EL is calculated as PD x LGD x EAD x M, where PD is the probability of default, LGD is the loss given default, EAD is the exposure at default, and M is the effective maturity. The expected loss for a portfolio is the sum of the individual expected losses if we ignore correlation between the LGD, EAD, and default event variables. The document then defines each component of the EL calculation.

    Copyright:

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    Download as DOCX, PDF, TXT or read online from Scribd
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    Expected Loss

    The expected loss (EL)


    is the amount that an institution expects to lose on a credit exposure over a given time horizon.

    EL = PD x LGD x EAD xM

    If we ignore correlation between the LGD variable, the EAD variable and the default event, the
    expected loss for a portfolio is the sum of the individual expected losses.

    What Does Default Probability Mean?


    The degree of likelihood that the borrower of a loan or debt will not be able to make the
    necessary scheduled repayments. Should the borrower be unable to pay, they are then said to be
    in default of the debt, at which point the lenders of the debt have legal avenues to attempt
    obtaining at least partial repayment.

    Generally speaking, the higher the default probability a lender estimates a borrower to have, the
    higher the interest rate the lender will charge the borrower (as compensation for bearing higher
    default risk).

    Probability of Default:

    It is the assessment of the likelihood of default of the borrower over one year.Expressed as a %,
    and counterparty specific.(PD)

    Loss Given Default:

    ItIs the assessment of the loss incurred on a facility at default of a counterparty. Expressed as a
    %, and transaction specific.(LGD)

    Exposure at Default:

    Expected gross exposure of the facility upon default of the obligor. Expressed in amounts, and
    transaction specific.(EAD)

    M = Effective Maturity = Sum of (time × future cash flow)

    Sum of future cash flows


    Formulas of four components

    PD = Probability of Default = Number of defaults during last 12 months

    Number of counterparties 12 months ago

    LGD = Loss Given Default = Losses incurred after default during last 5 or 7 years

    Total outstanding amount at default

    EAD = Exposure At default = Total outstanding amount+CCFX Underdrawn amount

    M = Effective Maturity = Sum of (time × future cash flow)

    Sum of future cash flows

    Example In percentage
    EL = PD x LGD x EAD Xm

    We can calcukate expected loss if probability default is 0.07% , lgd ia 39.5% and ead
    expected that 2.8 million for 2.5 years then we can calculate expected loss as given
    below.

    Expected Loss(£) / (%)= Probability of Default (%) X LGD % X EAD (£) x M

    £784 = 0.07% X 39.5 % X 2.8M X 2.5 YEARS

    0.028%

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