Question

Calculate the Basel Regulatory Credit VaR for a $100 Million loan portfolio with recovery rate of 95%. Assume that the correlation is zero. Select one: a. $0 b. None of the other answers provided is correct. c. $60,000 d. $5 million e. $95 million

Answer 1

Answer: Option (a) $ 0

A Correlation of 0 means that there is no linear relationship between the two variables.

We know that if two random variables are independent, the Covariance is 0.

VaR_P = α x σ_P x P₀

Here,

P₀         = Portfolio Value = $ 100 Million

P_i         = Value of asset i,

∑          = covariance matrix,

σ_P         = the standard deviation of the portfolio, As Covariance is Zero, Here σ_{P = 0}

α          = the chosen VaR-percentile. Where an α of 1.96 and 2.58 respectively indicating a VaR-percentile of 95% and 99%., So, Here α = 1.96

So, VaR_P = 1.96 x 0x $100 Million

VaR_P = $0