FRM Part II · FRM Exam Part II · Credit Risk Management
A bank has a USD 5 million committed credit line, of which USD 3 million is drawn. Its internal model assumes a credit conversion factor of 50% on the undrawn part at default. What is the exposure at default?
Exposure at default is the drawn amount plus the credit conversion factor times the undrawn commitment: USD 3 million plus 50% of USD 2 million, giving USD 4 million. Ignoring the undrawn part understates it and assuming full drawdown overstates it.
- AUSD 3.0 million
- BUSD 4.0 millionCorrect
- CUSD 4.5 million
- DUSD 5.0 million
Explanation
Undrawn amount = 5 − 3 = USD 2 million. EAD = drawn + CCF × undrawn = 3 + 0.5 × 2 = USD 4 million. USD 3 million ignores undrawn commitments; USD 4.5 million applies 50% to the whole limit; USD 5 million assumes full drawdown.
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