FRM Part 1 Practice Questions — All Questions

Loss given default (LGD) represents:

• a.The chance of default
• b.The portion of exposure lost if default occurs✓
• c.The coupon rate
• d.The maturity

LGD is the fraction of exposure not recovered when a counterparty defaults.

Expected credit loss is commonly modeled as a function of:

• a.Probability of default, loss given default, and exposure at default✓
• b.Only the coupon
• c.Only the maturity
• d.The stock price alone

Expected loss ≈ PD × LGD × EAD.

A rogue-trading loss from a control failure is an example of:

• a.Market risk
• b.Credit risk
• c.Operational risk✓
• d.Liquidity risk

Operational risk arises from failed processes, people, or systems.