Financial Risk Manager Part 1

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A risk analyst at a bank is calculating credit risk for various types of assets in the bank's portfolio. The analyst begins by estimating the parameters used as inputs to these calculations, and encounters several challenges while doing so. Which of the following will the analyst find to be correct regarding the estimated inputs for credit risk calculations?

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The probability of default of a derivative counterparty often increases as the bank's exposure at default with respect to that derivative position increases.

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The loss given default for a derivative transaction is typically negatively correlated with the counterparty's probability of default.

Banks must make both through-the-cycle and point-in-time estimates of loss given default to comply with both regulatory requirements and accounting standards.

Current exposure is typically used to estimate exposure at default for a line of credit in order to provide a conservative estimate.