Emerging Practices for Capital Adequacy © Copyright 2003, CCRO. All rights reserved. 31 Figure 16: Example of Potential Future Exposure • Expected default probability (EDP) by counterparty – This describes the likelihood of default based on the counterparty’s creditworthiness. It can be arrived at using custom scoring models, historical default data, external ratings, or commercially available models. • Loss given default by counterparty (LGD) – This is calculated as (1 – the recovery rate). The recovery rate measures the fraction of each dollar of exposure that can be recovered in the event of a default. 5.3.2 Elements in Generating Portfolio Unexpected Loss Figure 17 outlines the elements that go into the generation of portfolio unexpected loss and economic capital, and they are described as follows. Exposure Peak Maximum Likely Potential Exposure (C.I. %) One Year Expected Potential Exposure Current Exposure Peak Expected Potential Exposure Time Maximum Potential Exposure