A bank has an outstanding trade with one of its counterparties with an exposure of $500,000 and a recovery rate of 70%. The bank estimated that there is a 2% probability that the counterparty， will default on its obligations. What is the bank's expected loss?
A. $3,000
B. $7,000
C. $10,000
D. $150,000
Answer:A
At a recovery rate of70%, the recovery amount is $500,000XO.70 = $350,000
The loss given default (LGD) is $500,000 - $350,000 = $150,000
Expected loss is (probability of defaultXLGD) = 0.02X $150,000 = $3,000