Credit loss in exposure


Bank A has exposure to USD 100 million of debt issued by company R. Bank A enters into a credit default swap transaction with bank B to hedge its debt exposure to company R. Bank B would fully compensate bank A if company R defaults in exchange for a premium. Assume that the defaults of bank A, bank B, and company R are independent and that their default probabilities are 0.3%, 0.5%, and 3.6%, respectively. What is the probability that bank A will suffer a credit loss in its exposure to company R?

A. 4.1%

B. 3.6%

C. 0.0108%

D. 0.0180%

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Finance Basics: Credit loss in exposure
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