Question 8:

Roman has taken a loan for USD 4,000,000 to buy a luxury mansion. Take your date of birth as the probability of default (PD). If he defaults, the bank can foreclose the mansion and sell it off for USD X, where X = your birth month * 100,000. For example, if your date of birth is 30 July, your probability of default is 30% and bank will be able to sell the mansion for 7 * 100,000 = $700,000

The bank will have to pay 5% commission to broker for this transaction. Further, lawyers will demand 2% fee for the advisory for liquidation.

Calculate Expected Loss (EL) when exposure at default (EAD) is

1. 3,000,000
2. 2,000,000
3. 1,500,000

Which birthday will result in maximum and minimum loss for the bank?

5 marks