- Expected loss
- 900
The three inputs describe different things
Default probability is the likelihood of default over the stated horizon. Loss given default is the fraction of exposure lost if default occurs. Exposure at default is the amount exposed in that event. Percentages enter as percentages in the controls and are converted to decimals for multiplication.
Understand the two-outcome model
With exposure of 100,000 and loss given default of 45%, the default-event loss is 45,000. If its probability is 2% and the other outcome has zero loss, the expected loss is 900. The expectation is a probability-weighted average, not a prediction that a particular loan will lose exactly 900.
PD and LGD are decimal fractions. The result has the same amount units as EAD.
Use a consistent horizon and exposure definition
This learning tool keeps its three inputs fixed for one horizon. A full accounting or supervisory model may also require timing, discounting, scenario weighting, staging and other exposure-specific rules. Use the simple model to understand the components before studying those extensions.