Question

The calculation of the risk-adjusted asset values of OBS market contracts:

A. nearly always equals zero because the exchange over which the contract initially traded assumes all of the risk
B. requires multiplication of the credit equivalent amounts by the appropriate risk weights and includes all OBS transactions
C. requires the calculation of a conversion factor to create credit equivalent amounts for all OBS transactions
D. requires multiplication of the credit equivalent amounts by the appropriate risk weights and the calculation of a conversion factor to create credit equivalent amounts

Answer 1

To calculate the risk-adjusted asset values of OBS market contracts, a conversion factor is used to determine the credit equivalent amounts, which are then multiplied by the appropriate risk weights.

Step-by-step explanation:

The question pertains to the calculation of risk-adjusted asset values for off-balance sheet (OBS) market contracts. The correct response is that it requires multiplication of the credit equivalent amounts by the appropriate risk weights and the calculation of a conversion factor to create credit equivalent amounts. To calculate the credit equivalent amount, a conversion factor (also known as a credit conversion factor) is used to translate off-balance sheet exposures to on-balance sheet equivalents, which can then be adjusted for risk by applying the relevant risk weight.