Portfolio credit risk :Malz

[monsieuruzairo3]

Hi @David Harper CFA FRM CIPM
There is a question in Scheweser as follows
Suppose a credit position has a correlation to the market factor of 0.0625. What is the realized market value used to compute the probability of reaching a default threshold at 99% confidence level?

Now the solution as such is quite straightforward, My only doubt is that Schweser has taken Beta as 0.25 instead of 0.0625
p(m)= f[(k-m*beta)/sqrt(1-beta^2)]

Can you help me undestand why?

Thanks a lot!

Uzi

 

[monsieuruzairo3]

Hello @David Harper CFA FRM CIPM

I have started revision on the Credit risk part and went through one Bionic T question. Was sort of perplexed . Please help me understand the stuff
Reading is Credit default swap
Assume a protection seller enters into a senior basket CDS, which in addition to
covering the upper 40% in notional ($20 million) has an aggregate threshold of $10.0
million such that no payouts are triggered until the threshold is reached in aggregate losses
(no limit on individual reference losses). The senior CDS then pays for all losses in the $20 X
$30 tranche but only for losses above a $10 million aggregate threshold. What is the payout
on this senior basket CDS?
a) $1 million
b) $4 million
c) $5 million
d) $10 million

As i understand Senior basket attaches at 30 and detaches at 50 but beyond this I ahev no clue on the aggregate 10 mn $ loss and so on

Many thanks for your kind help

KR
Uzi

 

[hamu4ok]

Hi @David Harper CFA FRM CIPM
There is a question in Scheweser as follows
Suppose a credit position has a correlation to the market factor of 0.0625. What is the realized market value used to compute the probability of reaching a default threshold at 99% confidence level?

Now the solution as such is quite straightforward, My only doubt is that Schweser has taken Beta as 0.25 instead of 0.0625
p(m)= f[(k-m*beta)/sqrt(1-beta^2)]

Can you help me undestand why?

Thanks a lot!

Uzi

Ro=beta squarred

 

[southeuro]

Hi Uzi,

Firstly, this question is a continuation of the first question in the set. So you'll have to assume that a) the total notional is $50mil b) that the defaults are occurring as stated in the 1st question.

I may be wrong but here's my take on it. The way I see it is that "insurance" covers the top 40% -- hence the top 20 mil. Then, there's the threshold of $10 mil. The $20 in the middle is NOT covered. So given the defaults of 3 mil, 5 mil, 2 mil, 4 mil, and 1 mil, we can stay the first 3 are covered under the "threshold". The next 2 $4 and $1 are not. Hence $5 payout is expected.

Does that help?