1. VaR. [25 marks You have two $1m loans and each of them has a 2.5% probability of default. If a loan does not default, you earn a that recovery is uniform. If both loans default, assume that recovery is constant at 50% . Defaults are uncorrelated. profit of $0.2m. In case of default of a single loan, assume (a) [6 marks] Give a definition of Value at Risk (VaR) and Expected Shortfall (ES). (b) [9 marks] Calculate the Value at Risk (VaR) and Expected Shortfall (ES) 99% confidence level for each individual loan. at the (c) [6 marks Calculate the corresponding VaR(1 % ) and ES for a port folio of the two loans. (d) 4 marks Discuss the concept of subadditivity for risk measures in general and in the context of this exercise in particular. 1. VaR. [25 marks You have two $1m loans and each of them has a 2.5% probability of default. If a loan does not default, you earn a that recovery is uniform. If both loans default, assume that recovery is constant at 50% . Defaults are uncorrelated. profit of $0.2m. In case of default of a single loan, assume (a) [6 marks] Give a definition of Value at Risk (VaR) and Expected Shortfall (ES). (b) [9 marks] Calculate the Value at Risk (VaR) and Expected Shortfall (ES) 99% confidence level for each individual loan. at the (c) [6 marks Calculate the corresponding VaR(1 % ) and ES for a port folio of the two loans. (d) 4 marks Discuss the concept of subadditivity for risk measures in general and in the context of this exercise in particular