CRA CRA Credit Risk & Counterparty Exposure 1

Question 1

Which metric measures the maximum potential loss a firm could face from a counterparty defaulting on its obligations?

Accepted Answer

Potential Future Exposure (PFE)

Answer

Credit Value Adjustment (CVA)

Answer

Expected Positive Exposure (EPE)

Answer

Loss Given Default (LGD)

Question 2

In credit risk analysis, LGD stands for:

Accepted Answer

Loss Given Default

Answer

Liquidity Gap Determination

Answer

Leverage Gross Discounting

Answer

Loan Grade Distribution

Question 3

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?

Accepted Answer

Probability of Default (PD)

Answer

Exposure at Default (EAD)

Answer

Loss Given Default (LGD)

Answer

Recovery Rate (RR)

Question 4

Which credit risk framework allows banks to use internal models to estimate PD, LGD, and EAD for capital calculations?

Accepted Answer

Internal Ratings-Based (IRB) Approach

Answer

Standardized Approach

Answer

Credit Default Swap Model

Answer

Credit VaR Model

Question 5

What is a Credit Default Swap (CDS) primarily used for in risk management?

Accepted Answer

Transferring credit risk to another party

Answer

Hedging interest rate risk

Answer

Diversifying equity portfolios

Answer

Managing liquidity gaps

Question 6

Wrong-Way Risk (WWR) in counterparty credit risk occurs when:

Accepted Answer

Credit exposure increases as counterparty creditworthiness deteriorates

Answer

Credit exposure decreases as counterparty creditworthiness deteriorates

Answer

Market risk and credit risk move in opposite directions

Answer

Collateral value increases when default probability rises