Assignment 3: ERMC_Credit Risk Management ARORA
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Assignment 3: ERMC_Credit Risk Management ARORA
Details
This is an individual assignment. If you need assistance, my associate and I are available through normal channels.
Assessment
The entire assignment is worth ten points and the points for each question are listed. Correct
answers, while important, are not as important as correct analysis. Show your work. More credit will be given for correct analysis than for correct final numbers. Conversely, missing analysis or incorrect analysis will be more heavily deducted than incorrect final numbers.
Submission
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Directions
For each question, please provide both the analysis (equations and/or verbal thought processes) and final equations.
1. (3 pts) Bank ABC has the following Loans
|
Loans |
Current Utilization |
Limit |
Credit Line Decrease |
|
Loan 1 |
25% |
10000 |
0% |
|
Loan 2 |
10% |
20000 |
20% |
|
Loan 3 |
90% |
5000 |
10% |
|
Loan 4 |
60% |
30000 |
30% |
a. What’s the total credit exposure based on the data above before credit line decrease? b. What’s the total credit exposure post the credit line decrease?
c. Once credit lines are decreased, no adverse action reason (for the credit line decrease) needs to be provided to the customer?
(i) True
(ii) False
2. (3 points) Based on the data below, calculate the rate mix effect going from year1 to year 2?
Bank 2
|
|
High Tenure |
Low Tenure |
|
Share Y1 |
60% |
40% |
|
Share Y2 |
70% |
30% |
|
Default rate year 1 |
2.0% |
5.0% |
|
Default rate year 2 |
2.1% |
5.2% |
|
Default rate year 1 |
3.2% |
|
Default rate year 2 |
3.03% |
3. Based on the following transition table (4 points)
|
|
|
Current Rating |
|||
|
|
|
A |
B |
C |
Default |
|
Rating previous period |
A |
0.85 |
0.10 |
0.05 |
0.00 |
|
B |
0.01 |
0.90 |
0.05 |
0.04 |
|
|
C |
0.05 |
0.10 |
0.60 |
0.25 |
|
|
Default |
0.00 |
0.00 |
0.00 |
1.00 |
|
Calculate the 2-year cumulative probability of default for C rated credit?
2023-07-24