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Excel's storage of numbers in binary format also affects its accuracy. [3] To illustrate, the lower figure tabulates the simple addition 1 + x − 1 for several values of x. All the values of x begin at the 15 th decimal, so Excel must take them into account. Before calculating the sum 1 + x, Excel first approximates x as a binary number
where is the maturity of the longest transaction in the portfolio, is the future value of one unit of the base currency invested today at the prevailing interest rate for maturity , is the loss given default, is the time of default, () is the exposure at time , and (,) is the risk neutral probability of counterparty default between times and .
After developing these indices, one can calculate both PIT and TTC PDs for counterparties within each of the covered sectors. To obtain PIT PDs, one introduces the relevant indices into the relevant default models, re-calibrate the models to defaults, and apply the models with current and projected changes in indices as inputs.
Loss given default or LGD is the share of an asset that is lost if a borrower defaults. It is a common parameter in risk models and also a parameter used in the calculation of economic capital , expected loss or regulatory capital under Basel II for a banking institution .
The bank must clearly demonstrate the choice of the discount rate to the supervisor. Important considerations in quantifying risk parameters include: PD estimates may be derived based on one or more of the following techniques - internal default experience, mapping to external data, statistical default models.
The key variables for (credit) risk assessment are the probability of default (PD), the loss given default (LGD) and the exposure at default (EAD).The credit conversion factor calculates the amount of a free credit line and other off-balance-sheet transactions (with the exception of derivatives) to an EAD amount [2] and is an integral part in the European banking regulation since the Basel II ...
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Exposure at default or (EAD) is a parameter used in the calculation of economic capital or regulatory capital under Basel II for a banking institution. It can be defined as the gross exposure under a facility upon default of an obligor. [1] [2] Outside of Basel II, the concept is sometimes known as Credit Exposure (CE). It represents the ...