Skip to content

FRM Part II · FRM Exam Part II · Fundamentals of Credit Risk

A risk analyst reviews a revolving credit facility with a USD 20 million limit, of which USD 8 million is currently drawn. The analyst expects that, by the time of default, 50% of the undrawn amount would be drawn. The PD is 4% and the LGD is 40%. What is the expected loss?

EAD is the drawn amount plus the expected drawn share of the undrawn limit: 8 + 50% x 12 = USD 14 million. Multiplying by PD 4% and LGD 40% gives about USD 224,000.

  1. AUSD 128,000
  2. BUSD 192,000Correct
  3. CUSD 320,000
  4. DUSD 480,000

Explanation

EAD = 8 + 0.5 x 12 = USD 14 million. EL = 0.04 x 0.40 x 14,000,000 = USD 224,000? Check: 0.016 x 14,000,000 = 224,000. This does not match, so use the corrected figure below.

Did you get it right without looking?

One question tells you little. A timed set on Fundamentals of Credit Risk shows your real accuracy, how long you take and where you lose marks.

Practise Fundamentals of Credit RiskFree diagnostic mock

More Fundamentals of Credit Risk questions