Suppose that a bank has a total of $100 million of credit exposure, and the worst-case default rate over one-year is

An analyst has provided the following explanations of the WCDR equation given above.

• Explanation 1: If loan defaults are independent, then WCDR is less than or equal to 0.031.
• Explanation 2: The WCDR is a positive function of the correlation between loans.
• Explanation 3: The WCDR is the default rate by time T (for example, T=1 year) that will not be exceeded with a probability of 99.9%.
• Explanation 4: Correlated loans in a portfolio imply a WCDR greater than or equal to 0.031.

Which explanation(s) is (are) correct?

a.

All four explanations provided are correct

b.

Explanation 2

c.

Explanation 4

d.

Explanations 1, 2 and 3 are correct

e.

Explanation 1

f.

Explanation 3