A bank provides documentary letters of credit for a company that has a credit rating of A+.The face value of contracts outstanding is $2 million.Calculate the dollar value of capital required under the capital adequacy requirements to support these facilities,given that the bank supervisor's credit conversion factor is 20%.

Question

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The capital required is calculated by first applying the credit conversion factor (20%) to the face value of the contracts ($2 million), which gives $400,000. Then, assuming a capital adequacy requirement of 8%, the capital required is 8% of $400,000, which equals $32,000. However, since none of the provided options match this calculation, it appears there was a mistake in my explanation. The correct approach should involve applying the credit conversion factor directly to calculate the risk-weighted asset, and then applying the capital adequacy requirement. Given the options and the typical process for calculating capital requirements, the correct calculation would involve directly applying the credit conversion factor and the capital adequacy percentage to the face value, but it seems there was a misunderstanding in the calculation process presented. The correct answer based on the options provided and typical calculations would be $16,000, which suggests a different interpretation or a specific context provided by the bank's regulatory framework.

A Bank Provides Documentary Letters of Credit for a Company