hard · Frm Part 2 Credit Risk
In the context of Counterparty Credit Risk (CCR) under Basel III, why does the regulatory Exposure at Default (EAD) for derivatives utilize 'Effective Expected Positive Exposure' (EffectiveEPE) instead of a simple time-average of Expected Exposure (EE)?
- Because EffectiveEPE incorporates the credit quality of the counterparty into the exposure metric.
- To account for the high-quantile tail risk typically measured by Potential Future Exposure (PFE).
- To simplify the calculation by assuming a constant exposure profile over the life of the trade.
- To prevent the 'evaporation' of measured risk for short-dated trades that are likely to be rolled over by the business.
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