Explanation:
99% CVaR = 99th percentile of the unrecovered credit loss – Expected loss
Where,
99th percentile of the unrecovered credit loss = ($6.5m – $5.8m) × (1 − 0.88) = $84,000
and
Expected loss = PD × LGD × EAD
Where,
PD = Probability of Default
LGD = Loss Given Default
EAD = Exposure at Default
∴ Expected Loss = 0.07 × (1 − 0.88) × $6,500,000 = $54,600
CVaR at 99% confidence level,
= $84,000 − $54,600 = $29,400
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Q.5444 A newly hired analyst has gathered the following information on PYY Plc's bonds.
$6,500,000If the analyst estimates the value of the bond in 1 year at the 99% confidence level to be $5,800,000, what’s the bond’s implied 1-year 99% credit VaR?
A
$29,400
B
$54,600
C
$84,000
D
$24,500