CMA Final · Risk Management in Banking and Insurance · Sovereign Risk and Insolvency Risk
A bank has an exposure of ₹200 crore to a foreign sovereign. The estimated probability of default is 3%, and the loss given default is 40%. What is the expected loss on this exposure?
Expected loss equals exposure at default times probability of default times loss given default. Here that is 200 crore × 3% × 40%, which gives ₹2.4 crore. Ignoring loss given default would wrongly give ₹6 crore.
- A₹2.4 croreCorrect
- B₹6.0 crore
- C₹0.24 crore
- D₹8.0 crore
Explanation
Expected loss = EAD × PD × LGD = 200 × 0.03 × 0.40 = ₹2.4 crore. ₹6.0 crore ignores LGD (200 × 3%). ₹8.0 crore ignores PD (200 × 40%). ₹0.24 crore is a decimal slip.
Did you get it right without looking?
One question tells you little. A timed set on Sovereign Risk and Insolvency Risk shows your real accuracy, how long you take and where you lose marks.
More Sovereign Risk and Insolvency Risk questions
- In the context of sovereign risk, 'transfer risk' refers to the possibility that:
- A bank's total risk-weighted assets are ₹1,000 crore. It holds ₹40 crore of loans to a sovereign rated such that the risk weight is 150% and…
- Sovereign bond yield for a country is 9.5% and the risk-free yield of the benchmark is 6.0%. Using the credit spread approach with an assume…
- Which of the following is generally regarded as a leading indicator of sovereign default risk used by banks when assessing a country's exter…
- A bank has an unsecured exposure of Rs 50 crore to a foreign sovereign. The estimated probability of default is 4%, and the loss given defau…
- A bank has a sovereign exposure of ₹400 crore to a foreign government. The country risk provisioning policy of the bank assigns a 5% provisi…