Explanation:

The Expected Loss (EL) for each loan is calculated as

\text{EL} = \text{EA} * \text{PD} * \text{LGD}

Thus for Loan A, the expected loss is

\`$800`,000 * 1.2\% * 40\% = \`$3`,840

For Loan B, the expected loss is

\`$1`,200,000 * 0.8\% * 50\% = \`$4`,800

The total expected loss for the portfolio is the sum of individual expected losses, which is

\`$3`,840 + \`$4`,800 = \`$8`,640

Things to Remember

The Expected Loss (EL) is the average credit loss expected from an exposure over a given period, calculated as EL = EA * PD * LGD.
For a portfolio, the expected loss is the sum of the expected losses of its individual components.
When dealing with financial risk calculations, precision is key, and ensuring that all plausible answer choices are derived from the correct formulas is critical for proper assessment and decision-making.

Q.6187 A bank assessing the expected loss on its credit portfolio realizes that various loans have different levels of risk associated with them. Loan A with an exposure of `$800`,000 has a probability of default of 1.2% and a loss given default of 40%. Loan B with an exposure of `$1`,200,000 has a probability of default of 0.8% and a loss given default of 50%. Given these parameters, what is the expected loss for the bank's portfolio consisting of these two loans?

Exam-Like

Community

$8,640

$4,800

$3,840

$4320

Financial Risk Manager Part 2