Question

Calculate the Basel Regulatory Credit VaR for a $100 Million loan portfolio with recovery rate of 95% and copula correlation of 15%. Select one: a. None of the other answers provided is correct. b. $2,297,228 c. $625,315 d. $1,249,581 e. $4,683,931

Answer 1

Here, the answer would be none of the answers provided is correct. To calculate VaR, that is value at Risk, firstly, we would require to look at the Distribution published by Basel (Basel III Monitoring Report ) on their official website. We would then be able to find the right lowest returns for this specific category for the 95% confidence interval (because the recovery rate is 95%). Assuming it is 1.8%, the VaR calculations would be as follows:

VaR = The amount * the return mentioned above

= $100Million * 1.8%

= $1.8 Million

Now if there are four defaults, for example, the credit loss would be 4 * VaR = 4*1.8Million = $7.2Million

And thus, The Credit VaR would be = Credit Loss - VaR

= $7.2Million - 1.8 Million

= $5.4 Million