Financial Risk Manager Part 2

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Explanation:

The unexpected loss of the portfolio ( $UL_p$ ) can be calculated as: $UL_p = \\sqrt{n \\times UL_i^2 + n \\times (n - 1) \\times \\rho \\times UL_i^2}$

Where $n = 12$ , $UL_i = 85$ million, and $\\rho = 0.3$ . $UL_p = \\sqrt{12 \\times 85^2 + 12 \\times 11 \\times 0.3 \\times 85^2}$ $= \\sqrt{86,700 + 286,110}$ $= \\sqrt{372,810} \\approx 610.5817$ million.

The Economic Capital (EC) is the capital multiplier times the unexpected loss of the portfolio: $EC = 7.3 \\times 610.5817 \\text{ million} \\approx 4,457.25 \\text{ million}$ , which is approximately JPY 4.457 billion. Thus, Option C is correct.

Explanation:

The unexpected loss of the portfolio ( $UL_p$ ) can be calculated as: $UL_p = \\sqrt{n \\times UL_i^2 + n \\times (n - 1) \\times \\rho \\times UL_i^2}$

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Question A senior risk manager at a financial institution is presenting to a group of junior analysts on the capital requirements for the firm’s banking book. The manager demonstrates the calculation of economic capital, at the firm’s chosen confidence level of 99.9%, for a portfolio consisting of credit assets that have the same size and similar characteristics. The manager uses the following information:

Number of credit assets in the portfolio: 12

Capital multiplier at the 99.9% confidence level: 7.3

Unexpected loss of each credit asset: JPY 85 million

Default correlation between any pair of credit assets: 0.3

What would the manager be correct to estimate as the economic capital for credit risk for this portfolio?

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Last updated: July 5, 2026 at 07:29

JPY 2.234 billion

JPY 4.078 billion

JPY 4.457 billion

JPY 7.446 billion