aianjie

 

2、If the adjusted exposure for Bank X is $15 million, the probability of default is 2%, the recovery rate is 20%, and the standard deviation of EDF and LGD is 5% and 3%, respectively. What is the unexpected loss for Bank X?

A) $603,366.

B) $302,242.

C) $240,000.

D) $24,270.

aianjie

 

The correct answer is A

 

 

[attach]13925[/attach]

aianjie

 

3、Unexpected loss will increase under which of the following circumstances?

A) Variance of default frequencies increases.

B) Expected default frequency decreases.

C) Usage given default decreases.

D) Adjusted exposure increases but default frequency decreases.

aianjie

 

The correct answer is

Unexpected loss is defined as : [attach]13926[/attach].

 

As usage given default goes up, adjusted exposure increases, thus ‘usage given default decreases’ is incorrect. If expected default frequency decreases UL will decrease. ‘Adjusted exposure increases but default frequency decreases’ is ambiguous. ‘Variance of default frequencies increases’ will increase UL as the last term in the square root will increase.

aianjie

 

4、John Clayburn is trying to parameterize a credit risk model for his employer, Syacmoor Bank. Based on a large sample of loans, he has estimated a default frequency of 12%. John knows that this is a necessary input to calculate the unexpected loss. Which of the following is closest to the standard deviation of Sycamoor’s default frequency?

A) 88%.

B) 35%.

C) 12%.

D) 11%.

aianjie

 

The correct answer is B

The standard default model assumes a two-state (binary) default process. Therefore, the variance = EDF × (1 ? EDF) = (0.12) × (1 ? 0.12) = 0.1056. Thus, standard deviation of default frequency (0.1056)0.5 = 0.3496.

aianjie

 

5、Which of the following statements about unexpected loss is TRUE?

A) Unexpected loss is a non-linear function of adjusted exposure.

B) Adjusted exposure is a non-linear function of unexpected loss.

C) Unexpected loss is a linear function of adjusted exposure.

D) Adjusted exposure is a linear function of unexpected loss.

aianjie

 

The correct answer is C

The answer is clear from the equation of unexpected loss:[attach]13927[/attach]
 .

 

For example, doubling adjusted exposure will double the unepected loss.

aianjie

 

6、Which of the following statements about unexpected loss is TRUE?

A) Unexpected loss is a linear function of loss given default.

B) Loss given default is a non-linear function of unexpected loss.

C) Loss given default is a linear function of unexpected loss.

D) Unexpected loss is a non-linear function of loss given default.

aianjie

 

The correct answer is D

The answer is clear from the equation of unexpected loss: [attach]13928[/attach] .

 

For example, doubling LGD will not double the unexpected loss (as it appears inside the square root).