P1.T4.25. Usage given default (UGD) in credit exposure

[David Harper CFA FRM]

AIMs: Distinguish between expected and unexpected loss. Define exposures, adjusted exposures, commitments, covenants, and outstandings. Explain how drawn and undrawn portions of a commitment affect exposure. Explain how covenants impact exposures. Define usage given default and how it impacts expected and unexpected loss: Explain credit optionality. Describe the process of parameterizing credit risk models and its challenges.

Questions:

25.1. A bank's expected loss (EL) on an entirely unused commitment is $168,000; that is, none of the commitment has been drawn by the customer. The bank's usage given default (UGD) assumption is 70.0% and its loss given default (LGD) assumption is 80.0%. The probability of default (EDF) is 1.0%. What is size of the commitment, COM?

a. $16.7 million
b. $21.1 million
c. $30.0 million
d. $60.0 million

25.2. Among the variables or parameters necessary to the estimation of adjusted exposure (AE), which is the most difficult to parameterize?

a. Outstanding (OS)
b. Commitment (COM)
c. Usage given default (UGD)
d. Loss given default (LGD)

25.3. From an original commitment (COM) of $10.0 million, a bank's customer has drawn 30% (i.e., OS = $3 million). The probability of default (EDF) is 2.0% with a loss given default (LGD) estimate of 50.0%. What is the effect on expected loss (EL) if the usage given default (UGD) assumption is increased by +10%?

a. Zero
b. +$7,000
c. +$70,000
d. $+89,900

Answers:

• Here in forum

 

[superseer]

very practical examples

 

[Girish]

Here are my answers -

Q1 - Option C
Q2 - Option C
Q3 - Option B

 

[Nicole Seaman]

@Girish M

If you would also like to gain access to the answers and their explanations, all of our study packages come with full forum access. You can view our study packages HERE.

Nicole