Rsk 4804 - Study guides, Class notes & Summaries

1 INTRODUCTION The purpose of this tutorial letter is to provide you with suggested answers to assignments, and give you guidelines for the examination. 2 SUGGESTED ANSWERS TO ASSIGNMENTS Question 1 Distinguish between credit risk assessment and credit risk measurement. (10) Suggested Answer Credit risk assessment Is a credit management process that seeks to identify and control risks by determining the borrower’s probability of repaying the debt√. Through credit analysis, an asses...

Department of Finance, Risk Management and Banking

Dear Student, The following solutions are for Assignment 01 only. Solutions for Assignment 02 will be released shortly after the due date for Assignment 02 as Tutorial Letter 201 incorporating examination information. We hope you find this information value adding. Best wishes. Dr. J. Chisasa Senior Lecturer Question 1 Explain Probability of default and briefly discuss its uses. (10) Suggested solution It is a statistical percentage probability of a borrower defaulting√ and it is dir...

Expected Loss EL = PD x EAD x LGD Portfolio return (assuming a portfolio with two assets) E(Rp) = W1(R1) + W2(R2) Portfolio standard deviation (assuming a portfolio with two assets) σp= √x2A σ2A + x2Bσ2 + 2xAxBCovA,B Covariance = ρ σ1 σ2 Correlation (ρ) = covariance1,2 / σ1 σ2 Altman Z-score Z =1.2 X1 + 1.4 X2 + 3.3 X3 + 0.6 X4 + 0.1 X5 Financial Ratios Key Ratios Profitability Gross margin = gross profit net sales × 100

2 SUGGESTED ANSWERS TO ASSIGNMENTS Question 1 Distinguish between credit risk assessment and credit risk measurement. (10) Suggested Answer Credit risk assessment Is a credit management process that seeks to identify and control risks by determining the borrower’s probability of repaying the debt√. Through credit analysis, an assessment is made of the borrower’s income, balance sheet, and cash flow statements, along with character, capacity, and capital adequacy, all of which are ...

CONTENTS 1 INTRODUCTION 2 SUGGESTED SOLUTIONS TO ASSIGNMENTS 3 EXAMINATION GUIDELINES 4 CONCLUDING REMARKS 1 INTRODUCTION The purpose of this tutorial letter is to provide you with suggested answers to assignments, and give you guidelines for the examination. 2 SUGGESTED ANSWERS TO ASSIGNMENTS Question 1 Distinguish between credit risk assessment and credit risk measurement. (10) Suggested Answer Credit risk assessment Is a credit management process that seeks to identify and contro...

Question 1 Explain Probability of default and briefly discuss its uses. (10) Suggested solution It is a statistical percentage probability of a borrower defaulting√ and it is directly linked to credit grades √ Uses • Quantification of credit risk √ PD facilitates distinguishing the credit risk of different asset classes in a portfolio and judging the credit worthiness of the obligor. √ • Allocation of capital√ if the probability of default is high capital allocation is als...

Question 1 Explain Probability of default and briefly discuss its uses. (10) Suggested solution It is a statistical percentage probability of a borrower defaulting√ and it is directly linked to credit grades √ Uses • Quantification of credit risk √ PD facilitates distinguishing the credit risk of different asset classes in a portfolio and judging the credit worthiness of the obligor. √ • Allocation of capital√ if the probability of default is high capital allocation is als...

Department of Finance, Risk Management and Banking

Credit risk measurement While credit risk assessment relies on borrower provided information, credit risk measurement relies on lender’s analytics and risk measurement tools√ rather than the borrower’s. Credit risk measurement also has three goals. The first goal is to limit the credit risk exposure√ that the lenders accept when extending the debt. By determining the probability of a loss and the loss exposure amount over a period of time, the debt facility can be better structured...