Does the size of the banking system expose a country to systemic risk? Discuss this in the context of the European sovereign debt crisis and the 2008 global financial crisis.

b) Suppose that a one-year project that requires an initial investment of $5 million has a 65% chance of generating $12 million income, a 5% chance of generating $7 million income, a 10% chance of generating $3 million income and a 20% chance of generating nothing.
1. Illustrate the cumulative probability distribution for this project’s gains and losses [Feel free to draw the distribution by hand and paste a picture of it].

2. What is the project’s 75% one-year VaR? What is the meaning of it?
3. What is the expected shortfall when the confidence level is 75%?

4. In what way is the VaR inferior to the Expected Shortfall as a risk measure?

Answer rating: 100% (QA)

a The size of the banking system can expose a country to systemic risk if the banks are highly interconnected and heavily exposed to risky assets In the European sovereign debt crisis for example many ... View the full answer