Financial Risk Manager Part 2
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A credit analyst at a bank is asked to estimate the credit VaR (CVaR) for three loans in the bank's credit portfolio. The analyst assembles the following loan information:
| Loan | Maturity (years) | Exposure (SGD) | Loss given default | S&P rating |
|---|---|---|---|---|
| S | 2 | 55,000,000 | 0.8 | BBB |
| T | 3 | 36,000,000 | 0.9 | BB- |
| U | 4 | 50,000,000 | 0.7 | A |
In addition, the annual probability of default (PD) based on loan rating and maturity is provided in the table below:
| Loan maturity (years) | 2 | 3 | 4 |
|---|---|---|---|
| PD (investment grade) | 1.5% | 2.5% | 3.5% |
| PD (non-investment grade) | 5.0% | 12.0% | 18.0% |
Assuming the 95th percentile of the unrecovered credit loss for the three loans are the same, which of the following is correct about the comparison of the 95% CVaR of the loans?