FRM Part II · FRM Exam Part II · Introduction to Credit Risk Modeling and Assessment
A bank has a committed revolving credit line with a limit of USD 20 million, of which USD 8 million is currently drawn. The credit conversion factor applied to the undrawn portion is 50%. The borrower's PD is 4% and LGD is 40%. What is the expected loss using the drawn amount plus the converted undrawn commitment as EAD?
Expected loss is USD 224,000. EAD equals the drawn USD 8 million plus half of the undrawn USD 12 million, giving USD 14 million, which is multiplied by PD of 4% and LGD of 40%.
- AUSD 128,000
- BUSD 192,000Correct
- CUSD 320,000
- DUSD 224,000
Explanation
EAD = 8 + 0.5 x (20 - 8) = 8 + 6 = USD 14 million. EL = 0.04 x 0.40 x 14,000,000 = USD 224,000. Check: the option stated as correct must match this, so the computed value is USD 224,000.
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