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Assume that for estimating the PD of a counterparty (and hence capital requirements under the F-IRB approach) we use Merton's model, so that the 1-year
Assume that for estimating the PD of a counterparty (and hence capital requirements under the F-IRB approach) we use Merton's model, so that the 1-year probability of default of our counterparty is P(V K) = In(Vo) In (K) +(r. O The base information given are as follows: Assume r = 0.05, Vo = 25, K = 18, and o= 0.1. - Discuss your answer. 2 1. Calculate P(V K). 2. Perform a stress testing for different values of o (i.e. o = 0.15, 0.2 and 0.25). Then for each of the values obtained, calculate the capital requirements based on the following: Suppose that assets of a bank include RM 110 million of loans to A-rated corporations. Historical data show that the average LGD equals 61%. Given that the maturity for all loans is 3 years. Assume that for estimating the PD of a counterparty (and hence capital requirements under the F-IRB approach) we use Merton's model, so that the 1-year probability of default of our counterparty is P(V K) = In(Vo) In (K) +(r. O The base information given are as follows: Assume r = 0.05, Vo = 25, K = 18, and o= 0.1. - Discuss your answer. 2 1. Calculate P(V K). 2. Perform a stress testing for different values of o (i.e. o = 0.15, 0.2 and 0.25). Then for each of the values obtained, calculate the capital requirements based on the following: Suppose that assets of a bank include RM 110 million of loans to A-rated corporations. Historical data show that the average LGD equals 61%. Given that the maturity for all loans is 3 years
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