Explanation

Correct Answer: B

Calculation:

1. Expected Loss (EL) = Portfolio Value × Default Rate × (1 - Recovery Rate)

   • EL = 120,000,000 × 0.025 × (1 - 0.30)
   • EL = 120,000,000 × 0.025 × 0.70
   • EL = SGD 2.1 million

2. Unexpected Loss (UL) = VaR - Expected Loss

   • UL = 9.6 million - 2.1 million
   • UL = SGD 7.5 million

Key Concept:

• Expected Loss (EL): The average loss expected over time, calculated as PD × LGD × EAD
• Unexpected Loss (UL): The loss beyond what is expected, calculated as VaR minus Expected Loss
• VaR (Value at Risk): The maximum loss not exceeded with a given confidence level over a specified period

In this case, the 1-year 99% VaR of SGD 9.6 million represents the worst-case loss at the 99% confidence level, and subtracting the expected loss gives us the unexpected loss component.