FRM Part II · FRM Exam Part II · Credit Risk
A bank has a revolving credit line with a limit of USD 10 million, of which USD 4 million is drawn. The bank estimates that at default 50% of the undrawn amount would be drawn. The PD is 4% and LGD is 45% on the exposure at default. What is the expected loss?
Exposure at default is the drawn 4 million plus half of the undrawn 6 million, giving 7 million. Expected loss is 7 million x 4% x 45% = USD 126,000. Using only the drawn balance would give USD 72,000.
- AUSD 72,000
- BUSD 108,000Correct
- CUSD 180,000
- DUSD 126,000
Explanation
EAD = 4 + 0.5 x 6 = 7 million. EL = 7,000,000 x 0.04 x 0.45 = 126,000. Check: 7m x 0.018 = 126,000. So the correct value is 126,000, option 4.
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