Skip to content

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

Which statement best describes exposure at default (EAD) for a revolving credit facility?

For a revolving facility, EAD is the drawn balance plus the expected additional drawdown of the undrawn commitment before default, usually modeled with a credit conversion factor. Ignoring undrawn amounts understates exposure because stressed borrowers often draw heavily.

  1. AIt is the drawn amount at default plus an estimate of further drawings on the undrawn commitment before default.Correct
  2. BIt is the original committed limit regardless of usage.
  3. CIt is the drawn balance today only, since undrawn amounts carry no risk.
  4. DIt is the drawn balance multiplied by the loss given default.

Explanation

Borrowers in distress tend to draw on committed lines, so EAD includes the current drawn amount plus an expected portion of the undrawn commitment via a credit conversion factor. Using only the drawn balance understates risk; using the full limit overstates it on average.

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