RSK4804 Assignment 1 2025 - Due 30 May 2025

RSK4804
ASSIGNMENT 1
DUE DATE: 30 MAY 2025

, ASSIGNMENT 01 Due date: 30 May 2025 Unique number 865733


Aim: To evaluate your knowledge of some of the fundamental aspects of credit risk
management.




Answer the following questions and submit your assignment on myUnisa, at
https://my.unisa.ac.za. Limit your assignment to a maximum of six pages. Use Times
New Roman, font size 12.


Question 1




a. Explain the two most important drivers of credit risk and how those relate to the
probability of default (PD).




The two most important drivers


Loss Given Default (LGD)


This is the amount of money the lender loses when a borrower fails to repay the loan. If
LGD is high, the credit risk is also high. For example, if a company defaults and the bank
cannot recover much of the loan, it results in a big loss. When LGD increases, the
expected loss increases, even if the chance of default (PD) stays the same.


Exposure at Default (EAD)
This is the total value the bank is owed at the time the borrower defaults. If EAD is large,
the risk is higher because the bank stands to lose more money. So, even if PD is low, a
high EAD means a bigger potential loss.