Explanation:
Expected Loss (EL) = Probability of Default (PD) × Loss Given Default (LGD)
Given:
$7,000,000EL = 0.05 × $7,000,000 = $350,000
Unexpected Loss (UL) = Value-at-Risk (VaR) - Expected Loss (EL)
Given:
$2,000,000$350,000UL = $2,000,000 - $350,000 = $1,650,000
$10 million) is not directly used in these calculations since we already have the LGD ($7 million)Therefore, the correct answer is:
$350,000$1,650,000Ultimate access to all questions.
A credit risk analyst is analyzing an individual loan. The exposure amount at default of this loan is assumed to be $10 million. Based on the historical data, the analyst has estimated the following:
$7 million.Further, the analyst has computed the Value-at-Risk (VaR) for this loan, which equals $2 million. What is the expected loss and unexpected loss of this loan?
A
The expected loss is $350,000, while the unexpected loss is $2,000,000.
B
The expected loss is $350,000, while the unexpected loss is $1,650,000.
C
The expected loss is $700,000, while the unexpected loss is $2,000,000.
D
The expected loss is $700,000, while the unexpected loss is $1,650,000.
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