A fund manager holds a portfolio of £100 million, which consists of BBB-rated bonds. Assume that the one-year default probability is 5% and the recovery rate is 55%. The defaults are uncorrelated over years.

1) Explain the concept of expected and unexpected credit losses. 

2) Estimate the two-year cumulative expected credit loss on the portfolio of this fund manager.

Answer rating: 100% (QA)

Expected credit loss ECL refers to the estimated amount of credit losses that an entity expects to i... View the full answer