Financial Risk Manager Part 2

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Explanation:

The expected credit loss, (ECL), is given by:

\text{ECL} = \sum P_i \times D_i \times (1 - R_i)

Where:

\text{ECL} = 30,000,000 \times 0.01 \times 0.2 + 20,000,000 \times 0.025 \times 0.4 \text{ECL} = \`$260`,000

Q.1830 Albert Cook, FRM, owns a portfolio of bonds worth `$50` million. This portfolio is made up of AA-rated bonds (`$30` million) and BB-rated bonds (`$20` million). The 1-year probabilities of default for AA-rated and BB-related bonds are 1% and 2.5%, respectively. Determine the 1-year expected credit loss from Cook’s portfolio, given that the recovery rate for AA bonds is 80% while that of BB bonds is 60%.

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Last updated: July 5, 2026 at 07:14

$500,000

$260,000

$2,000,000

$200,000