What's new

# P2.T6.709. Credit risk components

#### Nicole Seaman

##### Director of FRM Operations
Staff member
Subscriber
Concept: These on-line quiz questions are not specifically linked to learning objectives, but are instead based on recent sample questions. The difficulty level is a notch, or two notches, easier than bionicturtle.com's typical question such that the intended difficulty level is nearer to an actual exam question. As these represent "easier than our usual" practice questions, they are well-suited to online simulation.

Questions:

709.1. Pre-settlement credit risk (aka, credit risk) is the risk of loss due to default by a borrower or counterparty and its basic quantitative drivers (or components ) are exposure at default (EAD), default probability (PD, aka EDF), loss given default (LGD), default correlation, ρ, concentration, and time horizon. About these components, which of the following statements is TRUE?

a. Expected loss increases non-linearly with PD
b. Unexpected loss increases non-linearly with PD
c. The time horizons and probability distributions (of returns) between credit risk and market risk are similar
d. Due to complexity, the best estimate of exposure at default (EAD) for derivatives portfolios is the notional amount

709.2. Analyst Jennifer needs to make an assumption for exposure at default (EAD) in the case of a revolving credit line that has been extended to a client, so that she can compute an expected loss (EL) on the credit line. The credit limit (aka, commitment) is $20.0 million, of which$6.0 million has been drawn (aka, outstanding). Her assumption, based on a single B-rating equivalent for the Loan Equivalency Factor (LEQ; aka, usage given default, UGD) is 50.0%. Finally, her assumption for default probability (PD) is 5.0% and her assumption for loss given default (LGD) is 75.0%. What is the expected loss (EL) on the credit line?

a. $487,500 b.$650,000
c. $750,000 d. Not enough information; ie, we need σ(LGD). 709.3. A credit portfolio consists of two$10.0 million exposures:
• Exposure #1 has an unexpected loss, UL(Exposure #1) = $557,000 • Exposure #2 has an unexpected loss, UL(Exposure #2) =$726,000
• The portfolio's unexpected loss, UL(Exposure #1 + Exposure #2) = $1.0 million • Their default correlation, ρ(Exposure #1, Exposure #2) is 20.0% or 0.20 Which is nearest to the risk contribution (RC) of Exposure #2? a.$390,000
b. $520,000 c.$600,000
d. \$2.06 million

#### dean zhao

##### New Member
I want to know the answer

#### Nicole Seaman

##### Director of FRM Operations
Staff member
Subscriber
I want to know the answer
Hello @dean zhao

The answers and detailed explanations to our daily practice questions are available to our customers who have purchased one of our FRM study packages because these questions are part of our paid practice question sets in the study planner. You can view all of our study packages here: https://www.bionicturtle.com/features-pricing/.

Thank you,

Nicole