In monetary market, we know that the lending rate of a loan commitment is composed of prime/LIBOR rate and credit spread. We consider that the credit spread have the property of mean reversion. According to this concept, we can price the loan commitment without extension and with extension. In addition, we use the primary element, interest rate, not the indebtedness value, to derive the closed form. It is different from other references.

Following liberalization and globalization of financial market, risk management is strictly important for business companies recently. BIS II will be released in the end of 2006. Compared with Basel I, it is more flexibility in Basel II, especially in credit risk. In Basel II, it permits banks to use internal ratings-based (IRB) approach to estimate credit risk. It means that banks can use models which they develop themselves to estimate credit risk after supervisory approves. So how to estimate EAD becomes important. Overall, we provided a method to estimate CCFs, and furthermore estimate EAD.

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