FRM Part II · FRM Exam Part II · Credit Risk
A risk manager wants to determine how much each loan contributes to the total portfolio credit VaR so that the contributions sum exactly to the portfolio figure. Which measure is appropriate?
Use the marginal, Euler-based risk contribution. It allocates portfolio credit VaR so that the contributions add up exactly to the total while reflecting each loan's correlation with the rest of the portfolio. Standalone and incremental VaR do not sum to the portfolio figure.
- AStandalone VaR of each loan
- BIncremental VaR from removing each loan
- CMarginal (Euler-based) risk contribution of each loanCorrect
- DExposure at default of each loan
Explanation
Euler-based risk contributions are additive and sum to the portfolio VaR. Standalone VaRs ignore diversification and do not sum to the portfolio figure. Incremental VaR does not generally sum to the total either. EAD ignores default risk and correlation.
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