Financial Risk Management Credit Risk Management 1

Question 1

What are the three key components of credit risk exposure?

Accepted Answer

PD, LGD, and EAD

Answer

VaR, CVaR, and stress test

Answer

Duration, convexity, and DV01

Answer

CDS spread, recovery rate, and credit rating

Question 2

What does Loss Given Default (LGD) represent?

Accepted Answer

The percentage of exposure a lender loses after recovery efforts

Answer

The total exposure outstanding at the time of default

Answer

The probability that a borrower will default within one year

Answer

The market value of collateral securing a loan

Question 3

A credit default swap (CDS) is primarily used to:

Accepted Answer

Transfer credit risk of a reference entity from protection buyer to protection seller

Answer

Speculate on interest rate movements

Answer

Hedge foreign exchange exposure in cross-border lending

Answer

Reduce operational risk in loan processing

Question 4

Under Basel III, what is the Internal Ratings-Based (IRB) approach used for?

Accepted Answer

Calculating credit risk capital using bank-estimated risk parameters

Answer

Setting market risk capital for trading books

Answer

Determining operational risk losses from internal models

Answer

Establishing liquidity coverage ratios

Question 5

What is counterparty credit risk (CCR)?

Accepted Answer

The risk that a counterparty defaults before settlement of a derivatives transaction

Answer

The risk that a bond issuer defaults before maturity

Answer

Credit risk arising from sovereign government debt

Answer

The risk of credit rating downgrades in a bond portfolio

Question 6

A bond rated 'BB' by S&P is classified as:

Accepted Answer

Speculative grade (junk) below investment grade

Answer

Investment grade with low default risk

Answer

In default or near default

Answer

Prime quality with the highest credit rating