Financial Risk Manager Part 1
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A financial institution's risk analyst uses Euler's theorem to assess how each loan impacts the Value at Risk (VaR) of a loan portfolio. The portfolio has a total VaR of GBP 20,300. Provided below are the details of the three loans within the portfolio:
| Loan | Loan amount (GBP) | Loan VaR (GBP) | Change in portfolio VaR for a 1% increase in loan VaR |
|---|---|---|---|
| Loan 1 | 180,000 | 10,000 | 58.1 |
| Loan 2 | 200,000 | 8,000 | 65.6 |
| Loan 3 | 160,000 | 9,500 | Unknown |
The correlation coefficients between the loan pairs in the portfolio are:
| Loan pair | Correlation |
|---|---|
| Loan 1 and Loan 2 | 0.1 |
| Loan 1 and Loan 3 | 0.1 |
| Loan 2 and Loan 3 | 0.8 |
Determine the closest estimate of the contribution of Loan 3 to the overall portfolio VaR.