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QUESTION 1: You have been provided with the formula for expected credit loss. ABC has a $30 million Accounts Receivable due in one year from
QUESTION 1: You have been provided with the formula for expected credit loss.
ABC has a $30 million Accounts Receivable due in one year from Omega Corp, a BBB rated entity. ABC Corp purchases a credit default swap (CDS) from XYZ Insurance (a AA entity) against the risk of default by Omega Corp. Answer the following:
- Describe the credit exposure, if any, that ABC has in this transaction and if it has been completely eliminated by the purchase of the CDS.
- Assume ABC has received $10 million cash collateral, that the probability of default is 0.30% and the recovery rate is 0.40 (40%), what is the expected loss to ABC. Show the formula and details of your calculation.
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