Question:

(a)

i. Expected loss= Exposure amount* probability of default* loss given default

ii. Positive covenants= covenants that showing the direction to a company. Positive covenants are affirmative and helps the company to set the right strategy.

iii. Securitization- technique of bundling and off-loading risks that a financial institution does not want to maintain in his books.

(b) Covenants help mitigate credit risk. Covenants are terms and conditions attached to a facility. Any breach of covenant may result in the Bank recalling facilities.

Types of covenants: working capital ratios; leverage; tangible net worth; dividend and capital expenditure restrictions; cash flow covenants.

Rules:
Keep it simple;
Focus on the borrower;
Set the appropriate covenant level;
Don't underestimate term risk;
Never waiver;
Keep records.