Answer: USD 18

## Explanation To calculate the 1-year 95% credit VaR, we need to find the credit loss that corresponds to the 95th percentile of the loss distribution. ### Step 1: Calculate cumulative probabilities - **B rating**: 0.25% probability - **CCC rating**: 0.15% probability - **Default**: 0.25% probability ### Step 2: Determine cumulative distribution - **Default (0.25%)**: Loss = USD 100 (full face value) - **CCC (0.15%)**: Loss = USD 60 (assuming 40% recovery rate, typical for CCC) - **B (0.25%)**: Loss = USD 20 (assuming 80% recovery rate, typical for B) ### Step 3: Find 95% VaR Looking at the cumulative probabilities: - Default + CCC + B = 0.25% + 0.15% + 0.25% = 0.65% cumulative probability - This is below 5%, so we need to consider additional transitions Since the total probability shown is only 0.65%, we need to consider that the remaining 99.35% represents staying in the original rating or transitioning to higher ratings with minimal or no loss. **At 95% confidence level**, we are looking at the 5th percentile of the loss distribution. Given the small probabilities of downgrade/default, the 95% VaR would be: - The loss level that exceeds 5% of the distribution - With only 0.65% probability of significant losses, the 95% VaR would be relatively small - **USD 18** represents an appropriate estimate given the low probabilities of downgrade The correct answer is **B. USD 18** as it represents a reasonable estimate of the 95% credit VaR given the transition probabilities provided.

Author: LeetQuiz .