What is expected loss in SAP IS-B-RA-CL - Default Risk and Limit System?

SAP Term: expected loss

• Component: IS-B-RA-CL

• Component Name: Default Risk and Limit System

• Description: Estimate for the amount that could be lost due to a negative change in the credit standing of a business partner or country within the time period under examination. Expected losses are not risks, but are foreseeable costs of a normal transaction that reduce the expected yield. Expected loss = EAD x PD x loss given default

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• Key Concepts: 
  Expected loss is a term used in the IS-B-RA-CL Default Risk and Limit System of SAP. It is a measure of the expected financial loss that a company may incur due to defaults on loans or other financial instruments. It is calculated by taking into account the probability of default, the amount of the loan, and the recovery rate. 
  
  How to use it: 
  Expected loss is used to assess the risk associated with a loan or other financial instrument. It can be used to determine the amount of capital that should be set aside to cover potential losses, as well as to assess the overall risk profile of a portfolio. 
  
  Tips & Tricks: 
  When calculating expected loss, it is important to consider all potential sources of risk, including credit risk, market risk, and operational risk. Additionally, it is important to consider any potential changes in market conditions that could affect the expected loss calculation. 
  
  Related Information: 
  Expected loss is closely related to other measures of risk such as Value at Risk (VaR) and Expected Shortfall (ES). These measures are used to assess the potential losses associated with a portfolio or investment strategy. Additionally, expected loss can be used in conjunction with other measures such as credit ratings and stress tests to assess the overall risk profile of a portfolio.