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exercise C2+3

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32 views4 pages

exercise C2+3

Uploaded by

Mai Nguyen Hien
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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CHAPTER 2: MEASURING CREDIT RISK CAPITAL STRUCTURE IN BANKS

Question 2.1. A Big Bank has two assets outstanding. The features of the loans are
summarized in table. Assuming a correlation of 0.3 between the assets, compute ELP and UL P
as well as the risk contribution of each asset.

Asset A Asset B

EA $ 8,250,000 $ 1,800,000

PD 0.50 % 1.00 %

LGD 50.00 % 40.00 %

σ PD 2.00 % 5.00 %

σ LR 25.00 % 30.00 %

QUANTITATIVE RISK MANAGEMENT 2

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Question 2.2.Suppose a bank has booked a loan with the following characteristics: total
commitment of $2,000,000 of which $1,800,000 is currently outstanding. The bank has
assessed an internal credit rating equivalent to a 1% default probability over the next year.
The bank has additionally estimated a 40% loss rate (or loss given default) if the borrower
defaults. The standard deviation of PD and loss given default (LGD) is 5% and 30%,
respectively. Calculate the expected and unexpected loss for this bank

Question 2.4. A Bank is trying to forecast the expected loss on a loan to a mid-size corporate
borrower. It determines that there will be a 75 % loss if the borrower does not perform the
financial obligation. This risk measure is the:
A. probability of default.
B. loss rate.
C. unexpected loss.
D. exposure amount.

QUANTITATIVE RISK MANAGEMENT 2

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Question 2.5.Which of the following statements about expected loss (EL) and unexpected
loss (UL) is true?
A. Expected loss always exceeds unexpected loss.
B. Unexpected loss always exceeds expected loss.
C. EL and UL are parameterized by the exact same set of variables.
D. Expected loss is directly related to exposure.
Question 2.6. If the recovery rate (RR) increases and the probability of default (PD)
decreases, what will be the effect on expected loss (EL), all else equal?
RR Increase ¿ PD Decreas
¿ Increase ¿ B . ¿ Decrease ¿ ¿ Increase ¿ C . ¿ Increase ¿ ¿ Decrease ¿
A. ¿
Question 2.7. Big Bank has contractually agreed to a $ 20,000,000 credit facility with Upstart
Corp., of which $ 18,000,000 is currently outstanding. Upstart has very little collateral, so Big
Bank estimates a one-year probability of default of 2 %. The collateral is unique to its industry
with limited resale opportunities, so Big Bank assigns an 80 % loss rate. The expected loss
(EL) for Big Bank is closest to:
A. $ 68,000.
B. $ 72,000.
C. $ 272,000,
D. $ 288,000.
Question 2.8. The following simplified credit rating transition matrix (aka, migration matrix)
displays one-year conditional probabilities for only two credits (A and B). For example, the A-
rated credit has an 80.0% probability of remaining A-rated at the end of the year, and a 20.0%
probability of being downgraded to B-rated, but is not expected to default within one year.
From year to year, migrations are independent; i.e., the matrix satisfies the Markov property.
A B D
A 80% 20% 0%
B 10% 70% 20%
D 0% 0% 100%
A bank has extended a three-year $15.0 million loan to a B-rated corporate borrower. The
bank assumes the exposure at default (EAD) is the principal amount of $15.0 million and
estimates a 40.0% recovery rate. If the relevant default probability is the three-year
cumulative default probability, then what is the expected loss (EL)?
a) $1,800,000
b) $2,250,000
c) $3,978,000
d) $4,392,000
QUANTITATIVE RISK MANAGEMENT 2

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Question 2.9. A credit portfolio contains an adjusted exposure of $30.0 million with a default
probability of 4.0%. In regard to loss given default (LGD), the Portfolio Manager estimates an
(LGD) of 40.0% with a standard deviation, o(LGD), of 40.0%. What is the position's
unexpected loss (UL)?
a) $2.250 million
b) $3.360 million
c) $5.490 million
d) $7.810 million

QUANTITATIVE RISK MANAGEMENT 2

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