RAROC A financial institution wants to evaluate the credit risk of a potential loan to a A-rated borrower via the RAROC approach. The contractual loan amount is $0.8 million, the loan spread (loan interest rate minus cost of funding) is 2.5%, the loan fee rate is 0.1%, and operating cost $1000. The current market value and the duration of the loan are calculated to be $1 million and 2 years, respectively. The current average yield on A-rated bonds is 4%. The change of the yield over the next year is estimated to follow a normal distribution with mean 1% and variance (1%) 2. (a) What is EL according to the duration model? (Hint: use the first equation for loss above (8) in Lecture Notes 3 and the distribution of change of yield.) (b) What is the RAROC of this loan with confidence level a = = 95? (Hint: a-th percentile of change of yield can be calculated from its normal distribution. Also, pay attention to the difference between contractual loan amount and market value of loan.)