FRM Part II · FRM Exam Part II · Credit Risk
A bank's exposure to a counterparty has simulated positive exposures that yield an expected positive exposure (EPE) of 8 million. The counterparty's one-year probability of default is 2% and the loss given default is 60%. Assuming exposure is independent of default (no wrong-way risk), what is the approximate expected credit loss (unilateral CVA) over the year?
The approximate expected credit loss is 96,000. It equals expected positive exposure of 8 million multiplied by the 2% default probability and the 60% loss given default, which is valid when exposure and default are independent.
- A96,000Correct
- B160,000
- C80,000
- D9,600,000
Explanation
Expected loss = EPE x PD x LGD = 8,000,000 x 0.02 x 0.60 = 96,000. Omitting LGD gives 160,000. Using 50% LGD would give 80,000. 9.6 million results from a decimal slip on PD.
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