Sustainability and Climate Risk (SCR) — Question 8

A global investment bank expands its risk department to include climate risk assessment. Senior management directs the department to implement approaches for evaluating how climate change affects traditional risk types. A risk manager recommends risk metrics for key risk types that measure physical and transition risk impacts.
To measure credit risk, which metric should the analyst recommend?

Answer options

Correct answer: D

Explanation

The correct answer is D, Loss given default, as it quantifies the potential loss an investor could face if a borrower defaults on a loan, which is directly related to credit risk. Options A, B, and C do not specifically measure default risk or potential losses in a credit context, making them less relevant for assessing credit risk in this scenario.