Expected Loss - Credit Risk

1. PD The probability of default of a borrower over a one-year horizon.

2. LGD The loss given default (or 1 minus recovery) as a percentage of exposure at default

3. EAD Exposure at default (an amount, not a percentage)

4. Maturity



For a given maturity, these parameters are used to estimate two types of expected loss (EL).



Expected loss as an amount: EL =  PD x LGD x EAD  


expected loss as a percentage of exposure at default: EL% = PD x LGD .


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 Measurement and Estimation of LGD.

 Loss given default includes three types of losses:

• The loss of principal
• The carrying costs of non-performing loans, e.g. interest income foregone
• Workout expenses (collections, legal, etc.)


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Source -

http://fic.wharton.upenn.edu/fic/papers/04/0401.pdf
http://riskarticles.com/credit-risk-how-to-calculate-expected-loss-unexpected-loss/
https://www.riskprep.com/all-tutorials/37-exam-31/114-default-correlations
http://www.quantatrisk.com/python-for-computational-finance/


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