Concept Notes· Risk
Credit & Counterparty Risk
Credit risk is the risk that a borrower or counterparty fails to pay. It is sized by expected loss (PD times LGD times EAD) for lending, and by exposure (current and potential future) for derivatives, where netting and collateral reduce it and CVA prices it. Interviews test the expected-loss decomposition, exposure after netting, and wrong-way risk.
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