Explanation:
The Exposure Amount (EA), also known as Exposure at Default (EAD), is the outstanding balance or the amount the bank is exposed to if the borrower defaults at the end of the horizon. It is an expected dollar amount at risk, not a statistical variance measure like the standard deviation of credit losses. Standard deviation of credit losses represents the Unexpected Loss (UL).
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505.3. Expected loss (EL) has three components: probability of default (PD), exposure amount (EA), and loss rate (LR). With respect to these components of EL, each of the following is true EXCEPT, which is not accurate?
A
Exposure amount (EA) is the standard deviation of credit losses estimated at the end of the horizon, excluding outstanding interest payments
B
Probability of default (PD) is the probability that a borrower will default before the end of a predetermined period of time (the estimation horizon typically chosen is one year)
C
Loss rate (LR) represents the ratio of actual losses incurred at the time of default (including all costs associated with the collection and sale of collateral) to the exposure amount
D
Expected loss (EL) is equal to the product of: the probability of default up to time H (horizon); the exposure amount at time H; and the loss rate experienced at time H; i.e., EL(H) = PD(H)*EA(H)*LR(H)