Credit Risk Management Credit Portfolio Management 2

Question 1

What is Risk-Adjusted Return on Capital (RAROC) used for in portfolio management?

Accepted Answer

Comparing risk-adjusted profitability across business lines or deals

Answer

Calculating regulatory minimum capital

Answer

Estimating the probability of default on a loan

Answer

Measuring interest rate sensitivity

Question 2

Credit Default Swaps (CDS) are used in portfolio management primarily to do what?

Accepted Answer

Transfer credit risk to a third party without selling the underlying loan

Answer

Convert fixed-rate loans to floating-rate

Answer

Generate fee income from loan origination

Answer

Reduce interest rate duration

Question 3

What is a Collateralized Loan Obligation (CLO)?

Accepted Answer

A securitization vehicle that pools corporate loans and issues tranched notes

Answer

A bond backed by mortgage loans

Answer

A government-guaranteed loan facility

Answer

A type of revolving credit facility

Question 4

Which of the following best describes 'granularity' in a credit portfolio?

Accepted Answer

The degree to which exposures are diversified across many small obligors

Answer

The proportion of secured versus unsecured loans

Answer

The credit quality distribution from AAA to CCC

Answer

The average maturity of loans in the portfolio

Question 5

What is the 'wrong-way risk' concept in credit portfolio management?

Accepted Answer

Correlation where counterparty default probability increases as its exposure to you increases

Answer

Risk that a hedging strategy increases rather than reduces exposure

Answer

The risk that portfolio models underestimate losses during benign periods

Answer

Loss amplification from incorrect collateral valuation

Question 6

In the CreditMetrics framework, what drives changes in portfolio credit value?

Accepted Answer

Borrower credit rating migrations and defaults over a one-year horizon

Answer

Changes in interest rate benchmarks only

Answer

Changes in collateral market prices

Answer

Fluctuations in loan origination volumes