expected loss

[darshang3]

Hi david can u explain how to solve this question WITH CALCULATION.

which of the following loans has the lowest credit risk?

Loan 1 year PD Loss given default Remaining term in months

A 1.99% 60% 3
B 0.90% 70% 9
C 1.00% 75% 6
D 0.75% 50% 12


Thanks.

 

[David Harper CFA FRM]

darshang, please see: http://forum.bionicturtle.com/viewreply/2102/
i think it's imprecise and should say (eg.) "Given annual cumulative PD of 1.99%, LGD = 60%, and 3 months remaining in term, and further assuming the monthly marginal PD is constant, what is the EL?"

David

 

[[email protected]]

Hi David,

This type of question is computational challenging. It takes more than 2min15 seconds to calculate the answer all the options. What is your advice in dealing with this type of question?

Regards
Learning

 

[David Harper CFA FRM]

Hi Learning,

I tend to agree, this takes time. First, practicing these cumulative PD questions helps a lot: you do the first one a few times, and i think it gets a lot faster.
i was playing around with it, if store 1/12; i.e., 1/12 = 0.0833 STO 1, then

1 - .0199
= (display .9801)
y^x
RCL 1 (display 0.0833)
= (display .9983)
y^x
3 (display .9950)
+/-
+ 1
= (display .005)
* .6
= (display 0.003)

that's as fast as i can do it, but i agree it still takes time...test taking style vary, but i gladly passed on really hard questions and saved them for the end, time depending ... I guess on this one, a good guesser might seize on the shortest maturity...

David