New models to predict default and loss could revolutionize risk management.
The article discusses ways to create models for predicting the likelihood of default, the amount lost in case of default, and the exposure at the time of default. While the probability of default is well-studied, the loss given default and exposure at default need more attention. The paper suggests practical methods for modeling exposure at default and loss given default and explains how to put these methods into practice. These approaches can be useful for those involved in managing and modeling risks.