Portfolio Characteristics:

• Portfolio Value: $800,000
• Number of Loan Positions: 8
• Default Probability per Loan (π): 3% or 0.03
• Recovery Rate: 0% (total loss in case of default)
• Default Correlation: 1 (defaults are perfectly correlated)

Impact of Default Correlation:
With a default correlation of 1, if one loan defaults, all are considered to default. Thus, the portfolio behaves as if it has only one loan with regard to default risk.

Expected Loss:
Expected Loss = Portfolio Value × Default Probability
Expected Loss = $800,000 × 0.03 = $24,000

Credit VaR at the 97% Confidence Level:
At a 97% confidence level, we look at the worst 3% of outcomes.
Since the default probability is 3%, it falls right at this confidence level.
In the worst-case scenario (top 3% of worst outcomes), all loans default, leading to a total loss of the portfolio value.
Total Loss = Portfolio Value = $800,000
Credit VaR = Total Loss − Expected Loss = $800,000 - $24,000 = $776,000