Financial Risk Manager Part 1
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An analyst is calculating the expected loss using the following information.
| Probability of default | 2% |
|---|---|
| Loss given default | 50% |
| Z-Score | 1.645 |
| Standard deviation | 2.59 |
| Exposure at default | $1,000,000 |
The expected loss is closest to?
Other
Community
TTanishq
A
$20,000
B
$500,000
C
$10,000
D
$51,800
Explanation:
The expected loss is calculated by multiplying the probability of default (PD) by the loss given default (LGD) and the exposure at default (EAD).
Calculation:
Expected Loss = PD × LGD × EAD
= 2% × 50% × $1,000,000
= 0.02 × 0.50 × $1,000,000
= $10,000
Explanation:
- Probability of default (PD) = 2% = 0.02
- Loss given default (LGD) = 50% = 0.50
- Exposure at default (EAD) =
$1,000,000
The Z-Score (1.645) and Standard deviation (2.59) are not needed for calculating expected loss, as they are typically used for calculating unexpected loss or value at risk measures.
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