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Explanation:
A default correlation equal to 0 implies the portfolio is a binomial-distributed random variable because there is no correlation with other firms/credits. In this case, the number of defaults would be binomially distributed with n = 100 and θ = 0.03
What's more each credit has a volume of $10,000 (= \frac{\`1`,000,000}{100}$)
The expected loss = $1,000,000 \times 0.03 = 30,000$
If there are 4 defaults, the credit loss is $10,000 \times 4 = `
Credit VaR = credit loss − expected loss = $40,000 − 30,000 = ` (which is $0.01 million).
Q.1842 A $1 million portfolio of credits is divided into 100 credits with each credit having default probability represented by π. The default correlation is zero, and each credit is equally weighed. If π = 0.03 and the 95th percentile of the number of defaults is given as 4, calculate the Credit VaR.
A
$0.01 million
B
$0.004 million
C
$0.09 million
D
$0.001 million
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