Assume that an FI's concentration limit on a particular sector is 15 per cent and that the sector's loss rate is 25 per cent. What is the maximum loss as a percentage of the FI's capital (round to two decimals)?

Question

Quizplus · Accepted Answer

To calculate the maximum loss as a percentage of the FI's capital, we can use the following formula:

Maximum allowable concentration = FI's capital x concentration limit
Maximum allowable sector exposure = Maximum allowable concentration / sector loss rate
Maximum allowable loss = Maximum allowable sector exposure x sector loss rate

Plugging in the given values:

Maximum allowable concentration = 15% x FI's capital
Maximum allowable sector exposure = (15% x FI's capital) / 25%
Maximum allowable loss = ((15% x FI's capital) / 25%) x 25%

Simplifying:

Maximum allowable loss = 15% x FI's capital x (1/4)
Maximum allowable loss = 3.75% x FI's capital

Therefore, the maximum loss as a percentage of the FI's capital is 3.75%. The closest answer choice is D: 3.75 per cent.

Assume That an FI's Concentration Limit on a Particular Sector