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Question 1 (25 marks) (1) Please list three types of risk that financial institution may face with and explain how each of risks could arise
Question 1 (25 marks) (1) Please list three types of risk that financial institution may face with and explain how each of risks could arise accordingly. (15 marks) (2) An investor holds a portfolio of $100 million. This portfolio consists of A-rated bonds ($40 million) and BBB-rated bonds ($60 million). Assume that the one-year probabilities of default for A-rated and BBB-rated bonds are 3% and 5%, respectively, and that they are independent. If the recovery value for A-rated bonds in the event of default is 70% and the recovery value for BBB- rated bonds is 45%, what is the one-year expected credit loss (in dollars) from this portfolio? (10 marks)
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