Explanation

Option A is incorrect because:

• Exposure amount (EA) is NOT the standard deviation of credit losses
• EA represents the total amount at risk when default occurs, typically including both principal and outstanding interest payments
• Standard deviation relates to the volatility of losses, not the exposure amount itself

Option B is correct because:

• Probability of default (PD) is indeed defined as the likelihood that a borrower will default within a specified time period
• This is a standard definition in credit risk management

In expected loss calculations:

• EL = PD × EA × LR
• EA (Exposure Amount): The total outstanding balance at the time of default, including principal and interest
• PD (Probability of Default): The likelihood of default occurring within a given time horizon
• LR (Loss Rate): The percentage of exposure that will not be recovered in the event of default

Option A misrepresents the definition of exposure amount by incorrectly describing it as a standard deviation measure and excluding interest payments, which are typically included in exposure calculations.