Assignment:
You have been asked by the Chief Risk Officer of your bank to determine how much should be set aside as a loan-loss reserve for a 1-year horizon on a USD 100 million line of credit that has been extended to a large corporate borrower. Of the original balance, USD 20 million has already been drawn and due to deteriorating economic conditions the bank is concerned that the borrower might find itself in a liquidity crisis causing it to draw on the remaining commitment and default. Given the following information from the bank's internal credit risk models what is an appropriate loan loss reserve to cover this eventuality?
1-year default probability = 0.35%
Drawdown given default = 80%
Loss given default = 60%
a. USD 210,000
b. USD 176,400
c. USD 140,000
d. USD 117,600