25. Question An analyst in the credit risk department of a bank is estimating the unexpected loss contributions (ULC) of individual loans to overall credit portfolio risk. The portfolio consists of many loans that have approximately the same characteristics and size. Additional information about each loan is provided below:
- Exposure amount: CNY 3,000,000
- Constant pairwise default correlation: 0.25
- Annual probability of default (PD): 4%
- Standard deviation of PD: 19.6%
- Annual loss rate (LR): 15%
- Standard deviation of LR: 9%
What is the correct estimate of the ULC of a single loan to the overall credit portfolio risk? | Financial Risk Manager Part 2 Quiz - LeetQuiz
Financial Risk Manager Part 2
Explanation:
C is correct. Using Equation presented in the reading, the unexpected loss contribution for a single credit asset (ULCi) is derived as follows:
ULCi=ULi∗ρ
where ρ = pairwise default correlation = 0.25,
and,
ULi=unexpected loss of each loan=EA∗PD∗σLR2+LR2∗σPD2
A is incorrect. CNY 25,851 is the result obtained by incorrectly getting the product of ULi and ρ.
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Question An analyst in the credit risk department of a bank is estimating the unexpected loss contributions (ULC) of individual loans to overall credit portfolio risk. The portfolio consists of many loans that have approximately the same characteristics and size. Additional information about each loan is provided below:
Exposure amount: CNY 3,000,000
Constant pairwise default correlation: 0.25
Annual probability of default (PD): 4%
Standard deviation of PD: 19.6%
Annual loss rate (LR): 15%
Standard deviation of LR: 9%
What is the correct estimate of the ULC of a single loan to the overall credit portfolio risk?