Credit Expected-Loss & Exposure
Size expected loss across a counterparty book, apply netting and collateral, and flag limit breaches.
The scenario
You've joined the credit-risk team. A book of counterparties needs its expected loss sized and its exposure measured after netting, with limits checked. Build the workbook: expected loss per name, netted exposure per counterparty, and a limit dashboard that flags breaches.
Where this shows up
Sizing expected loss and netted exposure across a counterparty book is a core credit-risk task and a common assessment at firms of this type.
Firms such as HSBC, Barclays, JPMorgan.
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Task brief
# Credit Expected-Loss & Exposure **Role relevance:** Credit Risk take-home **Estimated time:** 45 minutes **Difficulty:** Intermediate **Format:** Excel (.xlsx) ## What you are given - credit_expected_loss_exposure_starter.xlsx with five counterparties and fourteen open derivative trades - PD, recovery, limit, collateral and a netting flag per counterparty ## What you must deliver 1. Netted exposure per counterparty, after collateral 2. Expected loss per name with LGD derived from the recovery rate 3. Portfolio totals for both exposure and expected loss 4. A utilisation column and a breach flag ## Constraints & assumptions Netting applies only within a counterparty that has an agreement. Without one, exposure is the sum of positive mark-to-market only. Exposure is floored at zero. ## Submission note Complete the starter file, then compare your work against the mark scheme.
Your tasks
- 01Compute expected loss per name as PD x LGD x EAD, with LGD derived from a recovery rate.
- 02Net the derivative exposures per counterparty (max of zero and the sum of mark-to-market) and apply any collateral offset.
- 03Total the portfolio expected loss and the netted exposure.
- 04Compare each counterparty's exposure to its limit and flag breaches.
How you're assessed
The full points-based mark scheme is included with the pack.
What you'll learn
- The PD, LGD, EAD decomposition and how recovery sets LGD.
- Why netting and collateral reduce exposure, and how current exposure is max of zero and MTM.
- How a limit dashboard turns exposure into a control.