Ultimate access to all questions.
Explanation:
The alpha () multiplier (e.g., 1.4 under Basel) is used to scale Expected Positive Exposure (EPE) to Exposure at Default (EAD) primarily for the purpose of calculating Unexpected Loss (UL) or regulatory/economic capital. It accounts for wrong-way risk, model risk, and the variability of exposures. Expected Loss (EL) for counterparty credit risk typically uses Expected Positive Exposure (EPE) without the alpha multiplier. Therefore, applying alpha to EPE for computing Expected Loss is inappropriate.
No comments yet.
In addition to estimating expected loss for the traditional loan pool and the credit derivative portfolio, Thomas wants to estimate the "stress loss" for the entire portfolio where the "stress loss," SL, is the difference between the portfolio's stressed expected loss, EL(s), and its expected loss; i.e., SL = EL(s) - EL. This exercise will require developing an expected loss and a stressed expected loss for the credit derivatives sub-portfolio in order that expected losses and stressed expected losses can be summed across the two sub-portfolios. If he begins with the traditional expected loss (EL) calculation above and modifies it in order to produce a CCR-type version of the stressed EL, EL(s), for the derivatives sub-portfolio, then he is likely to make each of the following modifications to the formula EXCEPT which is probably NOT appropriate?
A
For both sub-portfolios, he can retain default probability, p(i), and stress it to higher stressed default probability, p(i)^s
B
For the derivatives sub-portfolio, replace EAD(i) with alpha multiplied by expected positive exposure, α*EPE(i)
C
For the derivatives sub-portfolio, stress exposure at default EAD(i) to higher stressed exposure at default, EAD(i)^s
D
For the derivatives sub-portfolio, stress expected positive exposure, EPE(i), to higher stressed expected positive exposure, EPE(i)^s