medium · 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 counterparty's current credit quality directly into the derivative exposure metric itself.
- To account for the high-quantile tail risk that is typically measured instead by Potential Future Exposure (PFE) metrics.
- To simplify the capital calculation by assuming a constant exposure profile over the full 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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