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Calculate the value at risk and expected shortfall

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Reference no: EM133118675

Question - You have two $1m loans and each of them has a 2.5% probability of default. If a loan does not default, you earn a profit of $0.2m. In case of default of a single loan, assume that recovery is uniform. If both loans default, assume that recovery is constant at 50%. Defaults are uncorrelated.

(a) Calculate the Value at Risk (VaR) and Expected Shortfall (ES) at the 99% confidence level (i.e., p = 1% for each individual loan.

(b) Calculate the corresponding VaR(1%) and ES(1%) for a portfolio of the two loans.

Reference no: EM133118675

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