FRM Part 1 Practice Questions — All Questions

Loss given default (LGD) represents:

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

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

Expected credit loss is commonly modeled as a function of:

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

Expected loss ≈ PD × LGD × EAD.

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

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

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