bank has two $10 million one-year loans. The probabilities of default are as indicated in the following table.

Outcome				Probability
Neither loan defaults				95%
Loan 1 defaults; Loan 2 does not default				2.5%
Loan 2 defaults; Loan 1 does not default				2.5%
Both loans defaults				0%

If a default occurs, all losses between 0% and 100% of the principal are equally likely. If the loan does not default, a profit of $0.5 million is made. What is banks one-year 97.5% VaR (in $million)?

a.

8.5

b.

5

c.

4.5

d.

7.5