Explanation

To calculate the Credit VaR at the 95% confidence level:

Given:

• Portfolio value: $1,000,000
• Number of credits (n): 1,000
• Default probability (π): 2% (0.02)
• Recovery rate: 0%
• Default correlation: 0
• 95th percentile defaults: 28

Calculation:

1. Each credit has equal exposure since the portfolio is equally distributed among 1,000 credits
2. Value per credit = $1,000,000 / 1,000 = $1,000
3. At the 95th percentile, we expect 28 defaults
4. Loss at 95th percentile = 28 defaults × $1,000 per credit = $28,000

Expected Loss Calculation:

• Expected defaults = n × π = 1,000 × 0.02 = 20 defaults
• Expected loss = 20 defaults × $1,000 = $20,000

Credit VaR Calculation:

• Credit VaR = Unexpected Loss = Loss at 95th percentile - Expected Loss
• Credit VaR = $28,000 - $20,000 = $8,000

Therefore, the Credit VaR at the 95% confidence level is $8,000, which corresponds to option B.