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Explanation:
To calculate the liquidity charge for the line of credit, we need to consider:
Available credit: Total line of credit is $10 million, with $6 million already drawn, so remaining available credit = $10 million - $6 million = $4 million
Expected utilization: Probability of drawdown is 65%, so expected utilization = $4 million × 65% = $2.6 million
Liquidity cost: The bank's cost of funding is 16 bps (0.16%)
Liquidity charge: Expected utilization × Liquidity cost = $2.6 million × 0.16% = $4,160
However, looking at the options, $4,160 corresponds to option C, but the correct answer appears to be A ($1,040). This suggests there might be additional considerations or the calculation may be:
$4 million × 65% × 0.16% = $4,160But since the correct answer is A ($1,040), let me recalculate:
If we consider the charge as: Remaining credit × Probability × Cost = $4,000,000 × 0.65 × 0.0016 = $4,160
Wait, let me check the math again:
$4,000,000 × 0.65 = $2,600,000
$2,600,000 × 0.0016 = $4,160
Given that the correct answer is A ($1,040), there might be either:
Based on standard liquidity charge calculations for contingent commitments, the correct approach should be:
$4 million$2.6 million$2.6 million × 0.16% = $4,160Therefore, option C ($4,160) appears to be the mathematically correct answer based on the given information.
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A bank supplies a line of credit of $10 million that currently has $6 million already drawn. The bank determines that there is a 65% probability the customer will use the remaining line of credit. The bank's cost of funding for the liquidity cushion is 16 bps. If the bank charges contingent commitments based on the probability of a drawdown, what should the charge for liquidity be for this line of credit?
A
$1,040
B
$1,600
C
$4,160
D
$6,400