FRM Part I · FRM Exam Part I · Measuring Credit Risk
A bank's credit loss distribution for its loan portfolio has an expected loss of 2.0 million and a 99% worst-case loss of 8.5 million over one year. Credit VaR defined relative to expected loss (unexpected loss at 99%) equals:
Credit VaR measured relative to expected loss is 6.5 million. It is the 99% worst-case loss of 8.5 million minus the expected loss of 2.0 million, because expected loss is covered by pricing and provisions and the unexpected part requires capital.
- A2.0 million
- B6.5 millionCorrect
- C8.5 million
- D10.5 million
Explanation
Credit VaR relative to the mean is the quantile loss minus expected loss: 8.5 − 2.0 = 6.5 million. The 8.5 million figure is the absolute quantile loss, which does not subtract the expected loss already covered by provisions. Adding the two (10.5 million) is a sign error.
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