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CMA Final · Risk Management in Banking and Insurance · Introduction to Risk Management

A bank holds a Rs 200 crore portfolio with a one-year probability of default of 2%, loss given default of 45% and exposure at default equal to the full portfolio value. What is the expected loss on the portfolio?

Expected loss equals probability of default times loss given default times exposure at default, so 2% x 45% x Rs 200 crore gives Rs 1.80 crore. Ignoring loss given default would wrongly give Rs 4 crore.

  1. ARs 1.80 croreCorrect
  2. BRs 4.00 crore
  3. CRs 0.90 crore
  4. DRs 9.00 crore

Explanation

Expected loss = PD x LGD x EAD = 0.02 x 0.45 x 200 = Rs 1.80 crore. Rs 4.00 crore ignores LGD (0.02 x 200). Rs 0.90 crore is wrong because it multiplies PD by LGD and then by 100 instead of 200.

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