Credit Risk Management Flashcards
6 cards from real Financial Risk Management practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 6 Credit Risk Management flashcards as text
What are the three key components of credit risk exposure?
Answer: PD, LGD, and EAD
Credit risk is defined by Probability of Default (PD), Loss Given Default (LGD), and Exposure at Default (EAD).
What does Loss Given Default (LGD) represent?
Answer: The percentage of exposure a lender loses after recovery efforts
LGD is the proportion of the exposure that is permanently lost after accounting for recoveries and costs, typically expressed as a percentage.
A credit default swap (CDS) is primarily used to:
Answer: Transfer credit risk of a reference entity from protection buyer to protection seller
A CDS allows a protection buyer to transfer the credit risk of a reference entity to a protection seller in exchange for periodic premium payments.
Under Basel III, what is the Internal Ratings-Based (IRB) approach used for?
Answer: Calculating credit risk capital using bank-estimated risk parameters
The IRB approach allows banks to use their own models to estimate PD, LGD, and EAD for calculating regulatory capital against credit risk.
What is counterparty credit risk (CCR)?
Answer: The risk that a counterparty defaults before settlement of a derivatives transaction
CCR is the risk that a derivatives counterparty fails to fulfill its obligations before the final settlement of the transaction's cash flows.
A bond rated 'BB' by S&P is classified as:
Answer: Speculative grade (junk) below investment grade
BB is below the BBB− investment grade threshold, placing it in the speculative (high-yield or junk) category with elevated default risk.
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