The Credit Metrics Model is commonly used to estimate the credit risk of a portfolio by calculating

the expected loss and potential future exposure.

To perform a basic Credit Metrics Model calculation, you will need the following inputs:

1. Probability of Default (PD): The estimated probability that a borrower will default on their
obligations within a given time frame.
2. Loss Given Default (LGD): The expected loss in the event of default, expressed as a
percentage of the exposure.
3. Exposure at Default (EAD): The estimated exposure amount at the time of default.

The Expected Loss (EL) can be calculated using the following formula:

EL = PD * LGD * EAD

Let's assume we have the following values for a particular borrower: Probability of Default (PD): =
0.05 (5%) Loss Given Default (LGD): = 0.4 (40%) Exposure at Default (EAD): = $100,000

Using these inputs, we can calculate the Expected Loss (EL):

EL = 0.05 * 0.4 * $100,000

EL = $2,000

So, the expected loss for this borrower is $2,000.