CMA Final · Risk Management in Banking and Insurance · Operational Risk and Off-Balance Sheet Risk
A bank issues a guarantee of Rs 50 crore, a direct credit substitute carrying a credit conversion factor of 100%. The counterparty risk weight is 80%. Ignoring any capital adequacy ratio, what is the risk-weighted asset amount?
The risk-weighted asset is Rs 40 crore. The guarantee is converted to a credit equivalent at 100%, giving Rs 50 crore, and then multiplied by the 80% counterparty risk weight. Ignoring the risk weight would wrongly give Rs 50 crore.
- ARs 50 crore
- BRs 40 croreCorrect
- CRs 25 crore
- DRs 20 crore
Explanation
Credit equivalent amount = 50 x 100% = Rs 50 crore. Risk-weighted asset = 50 x 80% = Rs 40 crore. Rs 50 crore ignores the risk weight; Rs 25 crore and Rs 20 crore wrongly apply a 50% conversion factor.
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