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Answer: The regulatory capital is $7.88 million
## Explanation **Correct Answer: C** This question demonstrates the regulatory capital calculation under the Basel framework: **Formula Components:** - **WCDR (Worst-Case Default Rate)**: 12.01% - Stress scenario default probability - **PD (Probability of Default)**: 0.75% - Long-run average default probability - **EAD (Exposure at Default)**: $100 million - Credit exposure - **LGD (Loss Given Default)**: 70% (1 - 30% recovery rate) **Calculation:** $$(12.01\% - 0.75\%) \times 100,000,000 \times 70\% = 11.26\% \times 100,000,000 \times 0.70 = \$7,882,000$$ **Interpretation:** - The difference (WCDR - PD) represents unexpected losses - Regulatory capital covers unexpected losses beyond expected losses - This ensures banks maintain adequate capital buffers for stress scenarios
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The regulatory capital can be computed by the following formula: (WCDR - PD) \times EAD \times LGD = (12.01\% - 0.75\%) \times 100m \times (1 - 30\%) = \`$7.88`m
A
Option A not provided in the text
B
Option B not provided in the text
C
The regulatory capital is $7.88 million
D
Option D not provided in the text
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