A bank has booked a loan with total commitment of USD 50,000 of which
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A bank has booked a loan with total commitment of USD 50,000 of which

A bank has booked a loan with total commitment of USD 50,000 of which 80% is currently outstanding.

The default probability of the loan is assumed to be 2% for the next year and loss given default (LGD) is estimated at 50%. The standard deviation of LGD is 40% and the standard deviation of the default event indicator is 7%. Drawdown on default is assumed to be 60%. The expected losses for the bank are:

a. USD 380

b. USD 420

c. USD 460

d. USD 500

Hint
ManagementThe expected loss refers to the sum of the total values of all possible losses, each multiplied by the probability of the loss to occur. The expected loss on a loans changes over time for a several  reasons. Expected Loss (EL) = Probability of Default (PD) x Loss Given Default (LGD) x Exposure at Default (EAD)....

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