A bank has two $10 million one-year loans. The probabilities of default are as indicated in...

 

Transcribed Image Text:

A bank has two $10 million one-year loans. The probabilities of default are as indicated in the following table. Probability Outcome Neither loan defaults Loan 1 defaults; Loan 2 does not default O a. 7.0 million. O b. 7.5 million O C. 8.0 million. O d. 5.8 million Loan 2 defaults; Loan 1 does not default Both loans default 95% 2.5% 2.5% 0% If a default occurs, all losses between 50% and 100% of the principal are equally likely. If the loan does not default, a profit of $0.5 million is made. What is the bank's one-year 97.5% VaR? A bank has two $10 million one-year loans. The probabilities of default are as indicated in the following table. Probability Outcome Neither loan defaults Loan 1 defaults; Loan 2 does not default O a. 7.0 million. O b. 7.5 million O C. 8.0 million. O d. 5.8 million Loan 2 defaults; Loan 1 does not default Both loans default 95% 2.5% 2.5% 0% If a default occurs, all losses between 50% and 100% of the principal are equally likely. If the loan does not default, a profit of $0.5 million is made. What is the bank's one-year 97.5% VaR?

Answer rating: 100% (QA)

Answer Option ... View the full answer