Discuss AIWMI CCRA-L2 Exam Topic 4 Question 131

Scott is a credit analyst with one of the credit rating agencies in Indi

a. He was looking in Oil and Gas Industry companies and has presented brief financials for following 4 entities:

From the data given below, calculate the standard deviation of the credit portfolio assuming that facility's exposure is known with certainty, customer defaults and LGDs are independent of one another and LGDs are independent across borrower(s).

Credit Facility A -- Loss Equivalent Exposure of $60m, expected Default frequency of 1.5%, loss given default

of 30%, Std Deviation of LGD -- 5% and Correlation to portfolio -- 0.10

Credit Facility B -- Loss Equivalent Exposure of $25m, expected Default frequency of 2%, loss given default of 12%, Std Deviation of LGD -- 12% and Correlation to portfolio -- 0.45

Credit Facility C -- Loss Equivalent Exposure of $15m, expected Default frequency of 5%, loss given default of 85%, Std Deviation of LGD -- 18% and Correlation to portfolio -- 0.22

AUS$6.88 million

BUS$ 1.16 million

CUS$ 1.66 million

DUS$ 0.10 million

Suggested Answer: B

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16 comments · newest first

Mariann 4 days ago

This question is tricky! I feel a bit overwhelmed.

Solange 9 days ago

I’m not sure. I might go with C. The LGD is really high for Facility C.

Edda 15 days ago

I agree with Ava. A makes sense with the high exposure.

Alisha 20 days ago

I’m confused about the correlation part. It complicates things.

Emilio 25 days ago

I’m leaning towards B. It feels more reasonable with the data provided.

Therese 1 month ago

I think A is the right answer. The calculations seem to point there.

Mendy 1 month ago

This question is tricky! I feel a bit overwhelmed.

Marget 1 month ago

Wow, I didn't expect the LGD for C to be that high!

Laurene 2 months ago

I disagree, B seems more plausible to me.

Ammie 2 months ago

Wait, how does C have such a high default frequency?

Pearlene 2 months ago

I think A is the right answer.

Titus 2 months ago

Standard deviation calculations can be tricky!

Glenn 2 months ago

I think the standard deviation is influenced by the correlation values, but I can't recall the exact formula we used.

Shenika 2 months ago

I feel a bit lost with the LGD and correlation factors. Did we cover how to combine those in our calculations?

Lino 3 months ago

This question reminds me of a similar practice problem we did on credit risk. I think we need to consider the exposure and default rates carefully.

Iraida 3 months ago

I remember we practiced calculating standard deviation in class, but I'm not sure how to apply it with the correlations here.

AIWMI CCRA-L2 Exam - Topic 4 Question 131 Discussion