Positive default correlation between these loans

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Reference no: EM132020648

Consider a portfolio of two loans, one of £500,000 and one of £1m. The one-year cumulative default probability is 2% for the larger loan and 4% for the smaller loan. Draw a probability distribution for this portfolio’s losses. Estimate the 1- year credit VaR for this portfolio at 99% confidence, assuming no default correlation and no recovery. How would your answer change if there is a positive default correlation between these loans?

Reference no: EM132020648

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