Question
Two corporations each have a 4% chance of going bankrupt and the event that one of the two companies will go bankrupt is independent of
Two corporations each have a 4% chance of going bankrupt and the event that one of the two companies will go bankrupt is independent of the event that the other company will go bankrupt. We assume that each company has outstanding bonds. However, risks due to changes in interest rates as well as the positive return due to interest are being ignored. A bond from any of the two companies will return 0 if the corporation does not go bankrupt and -1 if it does go bankrupt. Suppose an investor buys $1000 worth of bonds of the first corporation, which is then called portfolio P1, and similarly, an investor buys $1000 worth of bonds of the second corporation , which is then called portfolio P2. a) Calculate the VaR at = 5% critical level for each portfolio and for the joint portfolio P1 + P2.
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