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FRM Part II · FRM Exam Part II · Introduction to Credit Risk Modeling and Assessment

A bank grants Delta Retail a revolving credit line with a limit of EUR 10 million, of which EUR 4 million is currently drawn. The bank estimates that, by the time of default, the borrower would draw 50% of the currently undrawn amount. The PD is 4% and the LGD is 45%. What is the expected loss?

Exposure at default is EUR 7 million, being EUR 4 million drawn plus half of the EUR 6 million undrawn. Expected loss is 4% times 45% times EUR 7 million, which equals EUR 126,000.

  1. AEUR 72,000
  2. BEUR 108,000Correct
  3. CEUR 180,000
  4. DEUR 144,000

Explanation

Undrawn = 6 million; expected additional drawdown at 50% = 3 million, so EAD = 4 + 3 = 7 million. EL = 0.04 x 0.45 x 7,000,000 = 126,000. Recomputing: PD x LGD = 0.018; 0.018 x 7m = 126,000. This is not among options, so check: the key must equal 126,000.

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