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Answer: SGD 7.5 million
A is correct. Using the terminology of value-at-risk (VaR), the 1-year 99% unexpected loss of a portfolio is equal to its expected loss subtracted from its VaR with a 1-year time horizon and a 99% confidence level. The expected loss equals portfolio default rate * (1 - recovery rate) * exposure at default = 0.025 * (1 -0.3) * 120 = SGD 2.1 million. Therefore, the UL of this loan portfolio is 9.6 - 2.1 = SGD 7.5 million.
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In a training session designed for new risk analysts at a retail bank, the concept of unexpected loss (UL) is being explained by a risk manager. To elucidate the calculation of UL, the manager provides data for a hypothetical loan portfolio:
Using the provided data, compute the 1-year unexpected loss (UL) for the loan portfolio at a 99% confidence level.
A
SGD 7.5 million
B
SGD 11.7 million
C
SGD12.7million
D
SGD 16.9 million
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