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Credit Optionality

  • UGD is an option with the obligor to draw an amount.  The obligor has paid a premium in the form of “commitment fee”. Depending on the covenants the obligor has the right to draw from the commitment portion. The UGD is generally defined in the covenants
  • Historically UGD increases with decreased credit worthiness
  • In practice the commitment fee is not calculated very scientifically. Each UGD varies from deal to deal based on covenants therefore the adjusted exposure is not fully deterministic
  • Practitioners treat UGD as a known function based on the obligors credit rating at the
  • time horizon

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