Credit Risk: General Questions, question 213.1

[[email protected]]

In the Credit Risk: General Questions, number 213.1, I’m struggling with David’s calculation for the expected loss. I understand the calculation for the probability of zero defaults of 98.9846%, but I don’t understand the probability of default of 1.0119% of a 1mm loss and I similarly don’t understand the .0034% probability of default on 2 bonds. Any help on this is greatly appreciated.

 

[aadityafrm]

Hi Chris,

It's nothing but the bond values weighted by binomial probability of default in the 3 bond portfolio to calculate EL, nCr * (prob. of default)^r* (prob. of no default)^n-r.

here is the calculation for clarity -> (1-0.003396)^3*(0 mn.)+3*(0.003396)*(1-0.003396)^2 * ($1mn.)+3*(0.003396)^2*(1-0.003396)*($2mn)+(0.003396)^3 *($3mn.)
-> 98.9846%*0 + 1.0119%*$1.0 million + 0.0034%*$2.0 million + ~0%*$3.0 million = $10,188

Hope this is clear.
Thanks
Aaditya

 

[[email protected]]

Aaditya, I'm so appreciative that you took the time to help me. Thank you very much

 

[Imad]

In the Credit Risk: General Questions, number 213.1, I’m struggling with David’s calculation for the expected loss. I understand the calculation for the probability of zero defaults of 98.9846%, but I don’t understand the probability of default of 1.0119% of a 1mm loss and I similarly don’t understand the .0034% probability of default on 2 bonds. Any help on this is greatly appreciated.

Hi Chris,

Can you please show me the question in full.

Thanks

 

[Suzanne Evans]

Question 213 can be found here: http://forum.bionicturtle.com/threads/p2-t6-213-credit-value-at-risk-cvar.6333/

I'm going to move this post to the practice question forum as it related directly to the above PQ.

Thanks,
Suzanne