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Explanation:
Correct Answer: b) $25,000
To find the Unexpected Loss (UL), we first need to calculate the Expected Loss (EL).
Expected Loss (EL) Formula: EL = Exposure at Default (EAD) × Probability of Default (PD) × Loss Given Default (LGD)
Given values:
$450,000Calculating EL:
EL = $450,000 × 10% × 20% = $450,000 × 0.10 × 0.20 = $9,000
The unexpected loss is the difference between the actual total loss and the expected loss. Unexpected Loss Formula: Unexpected Loss (UL) = Actual Total Loss - Expected Loss (EL)
Given actual total loss:
$34,000Calculating UL:
UL = $34,000 - $9,000 = $25,000
Therefore, the unexpected loss is $25,000, which corresponds to option B. Option A is the expected loss, Option C is the total loss, and Option D would incorrectly be the sum of total loss and expected loss.
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24.5.1. Old Crow Bank approves a loan of $450,000 on January 1st for Lauren to purchase a home. The loan is classified under IFRS 9 as a performing loan and, therefore, uses a 12-month expected loss methodology. Lauren used the money to purchase a home on January 31st. If there is a 10% chance of default over the next 12 months and an 80% recovery rate (given default) over the same time period, what is Old Crow’s unexpected loss if Lauren defaults on the first payment on February 28th leading to a total loss of $34,000?
A
$9,000
B
$25,000
C
$34,000
D
$43,000