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

Potential Future Exposure (PFE) represents the maximum credit exposure at a given confidence level over a specified time horizon.

Question 2

In credit risk analysis, LGD stands for:

Accepted Answer

Loss Given Default

Answer

Loss Given Default (LGD) is the percentage of an exposure that a lender loses when a borrower defaults, after accounting for recoveries.

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

Probability of Default (PD) quantifies the likelihood that a borrower defaults within a defined time horizon, typically one year.

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

The Internal Ratings-Based (IRB) Approach under Basel II/III permits banks to use their own risk estimates for calculating minimum capital requirements.

Question 5

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

Accepted Answer

Transferring credit risk to another party

Answer

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.

(CRA) Certified Risk Analyst Practice Test

(CRA) Certified Risk Analyst Practice Test

CRA CRA Credit Risk & Counterparty Exposure 1