Explanation:
Portfolio Characteristics:
$1,500,000Expected Loss:
Since all bonds default together with a 2% probability, the portfolio Expected Loss (EL) is:
Expected Loss = Portfolio Value × Default Probability = $1,500,000 × 0.02 = $30,000.
Credit VaR at the 95% Confidence Level:
The confidence level is 95%, meaning we are looking at the 95th percentile of the loss distribution.
Since the probability of zero default is 98% (which is greater than 95%), the worst-case loss at the 95% confidence level is $0.
Credit VaR = Percentile Loss − Expected Loss
Credit VaR = $0 − $30,000 = -$30,000.
Therefore, the Credit VaR at the 95% confidence level is -$30,000.
Ultimate access to all questions.
Q.5539 A financial portfolio has a total value of $1,500,000 and consists of 15 equally valued corporate bonds. Each bond has a default probability of 2% and a recovery rate of zero. Since all bonds are issued by the same corporation, the default correlation between them is 1. What is the Credit Value at Risk (VaR) at the 95% confidence level for this portfolio?
A
$1,500,000
B
$0
C
$30,000
D
-$30,000
No comments yet.