Exposure at Default (EAD) modeling is concerned with tracking the progression of the Unpaid Principal Balance (UPB) over time. This dynamic evolution is influenced by various factors, including the loan's structural characteristics, such as interest rates and repayment options, as well as borrower behavior, which, in turn, can be shaped by external factors like prevailing interest rates. Probability of prepayment models are crafted to anticipate the trajectory of EAD, especially in cases where the UPB for certain credit products, like credit cards, may exhibit considerable uncertainty. It's worth noting that the sooner a borrower repays their loan, the lower the remaining risk exposure for the bank.

In our project, we adopted a straightforward approach, wherein a fixed amount of the capital is repaid during each period throughout the loan's term. This approach is intentionally conservative, acknowledging that many borrowers may indeed choose to make partial or full prepayments before the loan's maturity date. By taking this conservative stance, we aim to account for the potential reduction in risk exposure and ensure a more prudent assessment of EAD.