How much risk capital should the fi keep for unexpected loss

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Reference no: EM133379025

Question: Suppose a Financial Institution (FI) owns a portfolio consisting of 200 loans with an average value of US$ 10,000. Historically, the FI has an average default rate of 2.5%. The Loss Given Default (LGD) is US$0.40 per dollar. Use these data and the Poisson distribution to answer the following questions: For next year, calculate the probability of finding the following number of defaults: 2, 3, 4, 5, y 8? What would be the estimated loss (in US$) on this portfolio for default rates of 4% and 8%, respectively? How much risk capital should the FI keep for unexpected losses at the 1% level, i.e., a 1% "worst-case loss scenario"? In other words, calculate the Credit VaR for a 99% confidence level.

Reference no: EM133379025

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