Tips & Tricks : (Reading 45) Expected Loss : Discounted, Undiscounted, Premium, Time Value

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gnrocks

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Hey there,
After quite some struggling, i came up with the following formula, which i think is written nowhere, for Expected Loss :
Discounted = Undiscounted + Premium - Time Value
Takeaways :
  • Discounted > Undiscounted <=> Premium > Time Value <=> Premium for credit risk dominates time value of money
  • Discounted < Undiscounted <=> Premium < Time Value <=> Premium for credit risk is less than time value of money
  • Discounted = Undiscounted <=> Premium = Time Value <=> Premium and time value offset each other
Hint :
A quick way to remember those, is to rearrange as 2 pairs, in alphabetical order :
D vs U, and P vs T : The 2 pairs have the same sign (ex: D<U <=> P<T)
Voilà !
 
gnrocks wrote:
Hey there,
After quite some struggling, i came up with the following formula, which i think is written nowhere, for Expected Loss :
Discounted = Undiscounted + Premium - Time Value
Takeaways :
  • Discounted > Undiscounted <=> Premium > Time Value <=> Premium for credit risk dominates time value of money
  • Discounted < Undiscounted <=> Premium < Time Value <=> Premium for credit risk is less than time value of money
  • Discounted = Undiscounted <=> Premium = Time Value <=> Premium and time value offset each other
Hint :
A quick way to remember those, is to rearrange as 2 pairs, in alphabetical order :
D vs U, and P vs T : The 2 pairs have the same sign (ex: D<U <=> P<T)
Voilà !
Click to expand...
I have always have problem with understanding the premium of credit risk, can someone help me understand where this comes from and how that play a role in this??
 
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