Under Basel rules, expected credit loss is a function of which of the following sets of parameters:
A) 1 minus recovery rate, probability of default and exposure at default
B) exposure at origination, exposure at default and loss given default
C) loss given default, 1 minus recovery rate and exposure at default
D) exposure at origination, recovery rates and probability of default

Question

Quizplus · Accepted Answer

The expected credit loss under Basel rules is a function of exposure at origination, exposure at default, and loss given default. The choice A includes the 1 minus recovery rate, which is not explicitly used in this calculation. The choice C includes the loss given default and 1 minus recovery rate, but not exposure at origination, which is an important factor in determining expected credit loss. The choice D includes exposure at origination and probability of default, but not exposure at default or loss given default, which are also important factors in determining expected credit loss. Therefore, only choice B is the correct answer.

Under Basel Rules, Expected Credit Loss Is a Function of Which