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FRM Part II · FRM Exam Part II · Credit Risk

A large homogeneous portfolio has unconditional PD of 2%, LGD of 50%, and exposure of USD 1,000 million. Under the Vasicek model, the conditional PD at the 99.9% confidence level is 20%. What is the unexpected loss (99.9% loss less expected loss) for the portfolio?

Unexpected loss is USD 90 million. The 99.9% loss is 1,000 x 20% x 50% = USD 100 million, and expected loss is 1,000 x 2% x 50% = USD 10 million, so the capital-relevant difference is 90 million.

  1. AUSD 100 million
  2. BUSD 90 millionCorrect
  3. CUSD 80 million
  4. DUSD 110 million

Explanation

Worst-case loss = 1,000 x 0.20 x 0.5 = 100 million. Expected loss = 1,000 x 0.02 x 0.5 = 10 million. Unexpected loss = 100 - 10 = 90 million. 100 omits subtracting EL; 110 adds it.

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