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2. A portfolio consist of two bonds. The credit VAR is defined as the maximum loss
due to default at a cofidence level 98% over one year horizon. The probability of
joint default of the two bonds is 1.27% and the default correlation is 30%. The
bond value, default probability and recovery rate ara $ 1M, 3% and 60% for one
bond, and $600 thousand, 5%and 40% for the other. What is the expecetd credit
loss of the portfolio?, what is the best of unexpected credit loss (away from the
ECL) or creidt VAR for the portfolio?
Jawab :
ECL = 1.000.000 x 3% x (1-60%)
= 12.000
ECL = 600.000 x 5% x (1-40%)
= 18.000
ECL for the portofolio
= $ 12.000 + $ 18.000
= $ 30.000
3. Suppose bank Z lends EUR 1 M to X and EUR 5M to Y. Over the next year, the
PD for X is 0.2% and for Y is 0.3%. The PD of joint default is 0.1 The loss given
default is 40% for X and 60% for Y. What is the expected loss of default in one
year fir the bank?
Jawab :
X = EUR 1 M
Y = EUR 5 M
PD X = 0,2%
PD Y = 0,3%
PD XY = 0,1
LGD X = 40%
LGD Y = 60%
Credit Loss = pi x Cei x LGDi
= (EUR 1 M*0,2%*40%) + ( EUR 5 M*0,3%*60%) + (EUR 6 M*0,1)
= EUR 800 + EUR 9.000 + EUR 600.000
= EUR 609.800
4. Consider as A rated bond and BBB rated bond. Assume that the one year
probability of default for the A rated amnd BBB rated are 2% and 4% and that the
joint probability of the default of the two bonds is 0.15% what is the default
correlation between the two bond?
Jawab :
PD A rated bonds = 2%
PD BBB rated bonds = 4%
PD Joint Event = 0,15%
Corr A,BBB rated bond
= P(A)[1-P(A)] [1-P(join event)] P(B) [1-P(B)] [1-P(joint event)] + P(A) P(B)
P(join event)
= 0,02(1-0,02)(1-0,0015) 0,04(1-0,04)(1-0,0015) + (0,02)(0,04)(0,0015)
= 0,0196 0,038 + 0,0000012
= (0,14)(0,19) + 0,0000012
= 0,02729 + 0,0000012
= 0,0272912 = 0,027