Explanation:
We can calculate the expected loss as follows.
Maximum loss
\text{EL} = (\`$12`,000,000) \times (0.02) \times (0.80) = \`$192`,000Minimum loss
\text{EL} = (\`$12`,000,000) \times (0.01) \times (0.80) = \`$96`,000Therefore, the difference between maximum and minimum loss is `192`,000 – \`96,000 = \$96`,000.
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Question 72
Big City Bank has an exposure at default (EAD) equal to $12 million. The bank estimates a 1-year probability of default between 1% and 2% and assigns a 20% recovery rate. Which of the following amounts represents the difference between the minimum and maximum expected loss for Big City Bank?
A
Less than $100,000.
B
Between $100,000 and $200,000.
C
Between $200,000 and $300,000.
D
Greater than $300,000.
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