Financial Risk Management

Quiz 8

1. XYZ Bank is trying to forecast the expected loss on a loan to a mid-size corporate borrower. It
determines that there will be a 75% loss if the borrower does not perform the financial
obligation. This risk measure is
A. the probability of default.
B. the loss rate.
C. the unexpected loss.
D. the exposure at default.

2. Which of the following statements about expected loss (EL) and unexpected loss (UL) is true?
A. Expected loss always exceeds unexpected loss.
B. Unexpected loss always exceeds expected loss.
C. Expected loss requires quantifying the actual loss.
D. Expected loss is directly related to the exposure amount.

3. The relationship between expected loss (EL), unexpected loss (UL), and actual loss can be
best described as
A. actual loss = EL + UL.
B. actual loss = EL – UL.
C. actual loss = EL × UL.
D. actual loss = UL – EL.
4. Calculate expected loss if a bank expects a 1.8% default rate on its loans assuming the
recovery rate in the event of default is 60%.
5. Suppose bank TDA made a loan of 1,000 million VND to a borrower, of which 800 million
VND is currently outstanding. The bank has assessed an internal credit rating equivalent to a 2%
default probability over the next year. The bank has additionally estimated a 30% loss given
default if the borrower defaults. The standard deviation of PD and LR is 6% and 20%,
respectively. Calculate the expected and unexpected loss for TDA bank.
6. Suppose that a bank has a portfolio with 5,000 loans, and each loan is $2 million and has a
0.5% PD in a year. Also assume that the recovery rate is 50% and correlation between losses is
0.3. Calculate the standard deviation of the loss from the loan portfolio and the standard
deviation of the loss as a percentage of its size.
7. Bank XYZ has three assets outstanding with the following features. Assume the correlation
between assets are 0.2. Calculate the expected loss and unexpected loss for the portfolio as well
as the contribution of each asset to the portfolio risk.
Loan A Loan B Loan C
Outstanding loan balance $ 2,000,000 $3,000,000 $1,500,000
Probability of default 1% 0.8% 1.5%
Loss rate 40% 30% 50%
𝞼PD 3% 2% 4%
𝞼LR 25% 20% 30%