FRM Part II · FRM Exam Part II · Introduction to Credit Risk Modeling and Assessment
A bank has a revolving credit line with a USD 10 million limit, of which USD 4 million is currently drawn. The risk team estimates that, by default, the borrower would draw 50% of the undrawn amount. PD is 3% and LGD is 40%. What is the expected loss?
Placeholder
- AUSD 48,000
- BUSD 72,000Correct
- CUSD 96,000
- DUSD 120,000
Explanation
EAD = 4 + 0.5 × 6 = USD 7 million. EL = 0.03 × 0.40 × 7,000,000 = 84,000. Re-check: 0.012 × 7,000,000 = 84,000. So none of the first options matches; the correct figure is 84,000.
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