Answer: $1,040

## Explanation To calculate the liquidity charge for the line of credit, we need to consider: 1. **Available credit**: Total line of credit is $10 million, with $6 million already drawn, so remaining available credit = $10 million - $6 million = $4 million 2. **Expected utilization**: Probability of drawdown is 65%, so expected utilization = $4 million × 65% = $2.6 million 3. **Liquidity cost**: The bank's cost of funding is 16 bps (0.16%) 4. **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: - **Alternative calculation**: The liquidity charge might be calculated on the undrawn portion only, considering the probability: $4 million × 65% × 0.16% = $4,160 But 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: 1. A different interpretation of the calculation 2. The answer key might have an error 3. Additional factors not mentioned in the question **Based on standard liquidity charge calculations for contingent commitments, the correct approach should be:** - Remaining undrawn commitment: $4 million - Probability of drawdown: 65% - Expected utilization: $2.6 million - Liquidity cost: 16 bps (0.16%) - **Liquidity charge = $2.6 million × 0.16% = $4,160** Therefore, option C ($4,160) appears to be the mathematically correct answer based on the given information.

Author: LeetQuiz .