Credit Risk Management Professional 3

Question 1

Which of the following best describes 'wrong-way risk' in counterparty credit risk management?

Accepted Answer

Risk that exposure increases when the counterparty's credit quality deteriorates

Answer

Wrong-way risk occurs when exposure to a counterparty is positively correlated with the counterparty's probability of default, increasing potential loss.

Question 2

A $10M revolving credit facility is 40% drawn at the time of default, with a Credit Conversion Factor (CCF) of 75% on the undrawn portion. What is the EAD?

Accepted Answer

$8.5M

Answer

EAD = $4M drawn + (75% × $6M undrawn) = $4M + $4.5M = $8.5M.

Question 3

In the context of credit scoring, what is the primary purpose of a 'scorecard reject inference' technique?

Accepted Answer

To estimate the performance of previously rejected applicants

Answer

Reject inference techniques estimate what the default behavior of rejected applicants would have been, correcting the sample selection bias in scorecard development.

Question 4

Which stress testing approach applies a single severe but plausible macroeconomic scenario to estimate portfolio credit losses?

Accepted Answer

Scenario analysis

Answer

Scenario analysis applies a specific macroeconomic narrative (e.g., severe recession) to estimate how the portfolio would perform under those conditions.

Question 5

A retail bank wants to segment its mortgage portfolio by expected credit performance. Which approach is most appropriate for developing segmentation?

Accepted Answer

Logistic regression scorecard development

Answer

Logistic regression is the industry standard for developing credit scorecards that predict the probability of default and segment borrowers by risk.

Credit Risk Management Practice Test

Credit Risk Management Practice Test

Credit Risk Management Professional 3