CMA Final · Risk Management in Banking and Insurance · Introduction to Risk Management
Case: Sundaram Finance Bank has a loan portfolio where the borrower's exposure at default is Rs 50 crore, the probability of default is 4%, and loss given default is 45%. Using the expected loss framework (EL = PD x LGD x EAD), what is the expected loss on this exposure?
The expected loss is Rs 0.90 crore. Expected loss equals probability of default times loss given default times exposure at default: 4% x 45% x Rs 50 crore. Omitting loss given default would wrongly give Rs 2 crore.
- ARs 0.90 croreCorrect
- BRs 2.00 crore
- CRs 1.10 crore
- DRs 22.50 crore
Explanation
EL = 0.04 x 0.45 x 50 crore = 0.018 x 50 = Rs 0.90 crore. Check: 4% of 50 = 2 crore; 45% of 2 = 0.90 crore. Rs 2.00 crore ignores LGD (PD x EAD only), and Rs 22.50 crore ignores PD (LGD x EAD only).
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