Financial Risk Management Credit Risk Management 2

Question 1

What is 'concentration risk' in a credit portfolio?

Accepted Answer

Excessive exposure to a single borrower, sector, or geography

Answer

Risk from holding too many small-denomination loans

Answer

The risk that credit spreads widen across all sectors simultaneously

Answer

Risk from concentrating loan maturities within one quarter

Question 2

What is a credit migration matrix used for in credit risk management?

Accepted Answer

Estimating the probability that a borrower's credit rating will change over time

Answer

Mapping loan applications to credit officers for review

Answer

Calculating the interest rate to charge on variable-rate loans

Answer

Allocating ALLL reserves across loan categories

Question 3

Net Present Value (NPV) of a CDS from the protection buyer's perspective is zero at inception because:

Accepted Answer

The present value of the premium leg equals the present value of the protection leg at fair spread

Answer

No upfront payment is made in standard CDS contracts

Answer

CDS contracts always settle at par value

Answer

Mark-to-market rules prohibit initial gains or losses on derivatives

Question 4

What is 'credit VaR' (CVaR in the credit context)?

Accepted Answer

The difference between worst-case credit loss and expected credit loss at a given confidence level

Answer

The expected credit loss under normal conditions

Answer

The current mark-to-market value of a credit derivative portfolio

Answer

Basel III's standardized formula for credit risk capital

Question 5

Recovery rate in credit risk is most accurately defined as:

Accepted Answer

The fraction of exposure a lender recovers after a borrower defaults

Answer

The interest rate recovered on a defaulted loan after workout

Answer

The speed at which a borrower's credit rating improves post-default

Answer

The haircut applied to collateral in repo transactions

Question 6

In a collateralized loan obligation (CLO), tranching is used to:

Accepted Answer

Create securities with different risk/return profiles by allocating losses sequentially

Answer

Divide the loan pool by geography and sector

Answer

Reduce the credit risk of the underlying loans before securitization

Answer

Match loan cash flows to fixed quarterly payment schedules