CMA Final · Risk Management in Banking and Insurance · Credit Risk Management
Under the Basel framework, which of the following is the correct formula for Expected Loss (EL) on a credit exposure?
Expected Loss equals Probability of Default multiplied by Loss Given Default multiplied by Exposure at Default. Each component scales the loss, so they are multiplied together. Adding or dividing them would not give a rupee loss estimate for the exposure.
- APD × LGD × EADCorrect
- BPD × EAD ÷ LGD
- CLGD × EAD ÷ PD
- DPD + LGD + EAD
Explanation
Expected loss is the product of the probability of default, the loss given default and the exposure at default. The other forms either divide or add the components, which has no basis in credit risk measurement. For example, PD 2%, LGD 50%, EAD 100 gives EL of 1.
Did you get it right without looking?
One question tells you little. A timed set on Credit Risk Management shows your real accuracy, how long you take and where you lose marks.
More Credit Risk Management questions
- A bank's loan portfolio has three borrowers with exposures of ₹100 crore each. Each has a one-year PD of 4%, LGD of 50%, and defaults are as…
- Which statement about the difference between expected loss and unexpected loss in credit risk management is correct?
- Under the Basel framework's standardised approach to credit risk, a bank holds a Rs 200 crore unsecured corporate loan carrying a risk weigh…
- Under the Basel standardised approach for credit risk, a bank holds a Rs 50 crore unsecured corporate exposure with a risk weight of 150% an…
- A bank has an exposure at default of ₹40 crore to a manufacturing firm. The one-year probability of default is 2.5% and the loss given defau…
- Under the Basel framework, the 'loss given default' (LGD) of a credit exposure is best described as: