FRM Part II · FRM Exam Part II · Credit Value at Risk
A bank has two loans. Loan A: exposure USD 20 million, PD 1%, LGD 40%. Loan B: exposure USD 10 million, PD 3%, LGD 60%. What is the portfolio expected loss?
Portfolio expected loss is USD 0.26 million. Loan A contributes 20 x 1% x 40% = 0.08 million and Loan B contributes 10 x 3% x 60% = 0.18 million; expected losses add across loans regardless of correlation.
- AUSD 0.26 millionCorrect
- BUSD 0.38 million
- CUSD 0.14 million
- DUSD 0.50 million
Explanation
EL of A = 20 x 0.01 x 0.4 = 0.08 million. EL of B = 10 x 0.03 x 0.6 = 0.18 million. Total = 0.26 million. Omitting LGD gives 0.2 + 0.3 = 0.50 million.
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