aianjie

 

AIM 4: Explain the steps necessary to compute economic capital for counterparty risk using default only, full simulation.

1、Which of the following best describes economic capital? Economic capital measures the amount of:

A) cash a firm must maintain to cover a significant credit loss and remain solvent.

B) capital a firm must maintain to cover an average credit loss and remain solvent.

C) cash a firm must maintain to cover a credit loss in the 25 percentile and remain solvent.

D) capital a firm must maintain to cover a significant credit loss and remain solvent.

aianjie

 

The correct answer is A

Counterparty risk is very different from and more complex than lending risk. Counterparty risk is defined as the possibility that either party to a derivative transaction will fail to meet its obligations. Lending risk is defined as the possibility that an obligator will default on an outstanding loan.