# Exposure at Default ⎊ Area ⎊ Resource 2

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## What is the Exposure of Exposure at Default?

Exposure at Default (EAD) represents the total value of a counterparty's outstanding obligations at the precise moment of default. In the context of crypto derivatives, EAD quantifies the potential loss for a lending protocol or exchange if a borrower fails to meet margin calls. This metric is crucial for assessing credit risk in decentralized lending markets.

## What is the Calculation of Exposure at Default?

Calculating EAD for derivatives involves complex modeling that considers the current market value of the underlying assets and the specific terms of the contract. The calculation must account for potential future price movements and the time remaining until expiration. For options, the EAD calculation often incorporates stress testing to simulate extreme market scenarios.

## What is the Mitigation of Exposure at Default?

Protocols mitigate EAD through mechanisms like over-collateralization and automated liquidation processes. By requiring collateral in excess of the loan value, the protocol creates a buffer against market volatility. Timely liquidation of collateral upon default minimizes the actual loss incurred by the system.


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## [Risk-Weighted Capital Ratios](https://term.greeks.live/term/risk-weighted-capital-ratios/)

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**Original URL:** https://term.greeks.live/area/exposure-at-default/resource/2/