Exposure at Default
Overview
Exposure at default specifies how much the asset or loan is worth at the time of default.
(typically this means how much principal remains)
Default occurs over a given time interval (for example a month or a year).
At the beginning of the period, the value of the asset is known. As time progresses, the asset principal
can change as the obligor pays it down. Typically, paydown occurs according to the terms of the
loan.
(see
fixed income instruments)
If the loan is a bullet loan, then the principal is constant and EAD is just the principal at the beginning of
the period.
If the structure is an
amortized loan,
the outstanding principal needs to be calculated at the time of the default.
Many methods to simulate the default of the asset just simulate that the asset has defaulted in the given time interval,
not when. This means that modeler must either simulate a time of default, or make some simplifying assumptions in this regard.
Methods
