CRA Credit Risk & Counterparty Exposure Flashcards
6 cards from real CRA practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 6 CRA Credit Risk & Counterparty Exposure flashcards as text
Which metric measures the maximum potential loss a firm could face from a counterparty defaulting on its obligations?
Answer: Potential Future Exposure (PFE)
Potential Future Exposure (PFE) represents the maximum credit exposure at a given confidence level over a specified time horizon.
In credit risk analysis, LGD stands for:
Answer: Loss Given Default
Loss Given Default (LGD) is the percentage of an exposure that a lender loses when a borrower defaults, after accounting for recoveries.
A credit analyst wants to estimate the likelihood that a borrower will fail to meet its debt obligations within one year. Which parameter does this describe?
Answer: Probability of Default (PD)
Probability of Default (PD) quantifies the likelihood that a borrower defaults within a defined time horizon, typically one year.
Which credit risk framework allows banks to use internal models to estimate PD, LGD, and EAD for capital calculations?
Answer: Internal Ratings-Based (IRB) Approach
The Internal Ratings-Based (IRB) Approach under Basel II/III permits banks to use their own risk estimates for calculating minimum capital requirements.
What is a Credit Default Swap (CDS) primarily used for in risk management?
Answer: Transferring credit risk to another party
A Credit Default Swap (CDS) is a derivative contract that transfers the credit risk of a reference entity from the protection buyer to the protection seller.
Wrong-Way Risk (WWR) in counterparty credit risk occurs when:
Answer: Credit exposure increases as counterparty creditworthiness deteriorates
Wrong-Way Risk exists when exposure to a counterparty is adversely correlated with the counterparty's credit quality, increasing loss severity at default.