Answer: $40,000

## Explanation To calculate the credit VaR at the 95% confidence level: **Step 1: Understand the portfolio structure** - Portfolio value: $1,000,000 - Number of credits: n = 50 - Each credit value: $1,000,000 / 50 = $20,000 - Default probability: π = 0.02 - Recovery rate: 0% - Default correlation: 0 **Step 2: Use the binomial distribution information** - The 95th percentile of defaults is 3 - This means at the 95% confidence level, we expect up to 3 defaults **Step 3: Calculate the worst-case loss** - With 3 defaults, the loss = 3 × $20,000 = $60,000 - However, this is the absolute loss, not the VaR **Step 4: Calculate credit VaR** - Credit VaR = Worst-case loss - Expected loss - Expected loss = n × π × credit value = 50 × 0.02 × $20,000 = $20,000 - Credit VaR = $60,000 - $20,000 = $40,000 **Step 5: Verify the calculation** - Portfolio value: $1,000,000 - Expected portfolio value: $1,000,000 - $20,000 = $980,000 - 95th percentile portfolio value: $1,000,000 - $60,000 = $940,000 - Credit VaR = Expected portfolio value - Worst-case portfolio value = $980,000 - $940,000 = $40,000 Therefore, the credit VaR at the 95% confidence level is **$40,000**.

Author: LeetQuiz .