Question
a. Suppose that the assets of bank consist of $500 million of loans to BBB-rated corporations. The probability of default (PD) for the corporations is
a. Suppose that the assets of bank consist of $500 million of loans to BBB-rated corporations. The probability of default (PD) for the corporations is estimated as 1.5% and the loss given default (LGD) is 60%. The average maturity is 4.5 years. Calculate the risk-weighted assets (RWA) under the Basel II internal rating based (IRB) approach.
b. Suppose an investor holds an equity portfolio which is exposed to various market variables with different liquidity horizons. Carefully outline and describe the steps to computing a 10-day 97.5% expected shortfall using the overlapping periods method in conjunction with historical simulation and the cascade approach.
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