CMA Final · Strategic Financial Management · Risks in Financial Market
A bank's loan book of Rs 200 crore has a probability of default of 2%, loss given default of 45% and exposure at default equal to the full book. What is the expected credit loss?
The expected credit loss is Rs 1.80 crore. It is calculated as probability of default 2% times loss given default 45% times exposure at default of Rs 200 crore.
- ARs 4.00 crore
- BRs 1.80 croreCorrect
- CRs 9.00 crore
- DRs 0.90 crore
Explanation
Expected loss = PD x LGD x EAD = 0.02 x 0.45 x 200 = Rs 1.80 crore. Rs 4 crore omits LGD. Rs 9 crore omits PD and uses LGD only.
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