ABC Bank is considering a loan to XYZ Bank. XYZ Bank has requested a credit faci
ID: 2768952 • Letter: A
Question
ABC Bank is considering a loan to XYZ Bank. XYZ Bank has requested a credit facility of $10 million and $4 million of that will be used immediately. Using the internal risk rating system, ABC Bank has assigned an internal credit rating of BBB equivalent with a PD of 2% over the next year and a recovery rate of 40%. Based on the analysis of historical loss data, the draw down upon default is approximately equal to 60%, the standard deviation of PD and the standard deviation of LGD are estimated to be 10% and 20% respectively. The adjusted exposure and unexpected loss for ABC Bank would be close to:
a) 3.6 million; 0.25 million
b) 7.6 million; 0.25 million
c) 3.6 million; 0.5 million
d) 7.6 million; 0.5 million
Explanation / Answer
b) 7.6 million; 0.25 million