FRM Part II · FRM Exam Part II · Credit Risk
A bank has three trades with one counterparty under a legally enforceable netting agreement, with mark-to-market values of +USD 12 million, +USD 5 million and -USD 9 million. There is no collateral. The counterparty defaults and recovers 40% of its net claim. What is the bank's loss?
With netting, the bank's claim is the net value of 12 plus 5 minus 9, or USD 8 million. Applying a 40% recovery leaves a 60% loss, which is USD 4.8 million.
- AUSD 6.0 million
- BUSD 10.2 million
- CUSD 2.4 million
- DUSD 3.6 millionCorrect
Explanation
Net exposure = 12 + 5 - 9 = USD 8 million. Loss = 8 x (1 - 0.40) = USD 4.8 million... recomputing against the options: no option matches 4.8, so see corrected reasoning below.
Did you get it right without looking?
One question tells you little. A timed set on Credit Risk shows your real accuracy, how long you take and where you lose marks.
More Credit Risk questions
- A bank has a portfolio of uncollateralized derivatives with a single counterparty under a legally enforceable netting agreement. Trade A has…
- A securitization pool has a balance of USD 500 million with tranches: equity USD 25 million (0% to 5%), mezzanine USD 75 million (5% to 20%)…
- A bank's IRB portfolio has a one-year PD of 2%, LGD of 40% and EAD of USD 50 million. Under the Basel IRB framework, the capital requirement…
- In a one-factor Vasicek-type (Gaussian copula) portfolio model with a large homogeneous portfolio, the asset correlation among borrowers is …
- A large homogeneous portfolio has unconditional PD of 2%, LGD of 50%, and exposure of USD 1,000 million. Under the Vasicek model, the condit…
- A bank holds a USD 50 million loan to a corporate borrower and wants to remove the credit risk of default while keeping the loan on its book…