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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
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. Explain the concept of expected and unexpected credit losses. Estimate the two-year cumulative expected credit loss on the portfolio of this fund manager.
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