Credit Risk Management: Module 1

Tables 1.6 and 1.7

Table 1.6Expected value with one credit exposure
Probability

Payoff

Expected value

0.20

0.80

1000000

800000
800000

The standard deviationof the loss will be:

If we now have two credit exposures for the same amount the expected valu

Table1.7Expected Value and Standard Deviation w

Probability (P)

Payoff

(Y)

0.040

0.320

500,000

0.640

1,000,000

1.00

both credits default with probability of .20 but using p

probability is .20 .20 = .04. There are two states of the wo
the other is good (.20 .80) 2 = .32 and one state of the
(.80 .80).

Probability of Loss
Probability of NO Loss
Number of Credits
Credit Amount
Recovery Given Loss
Credit Value Given loss

0.20
0.80
2
500,000
0%
0

same amount the expected value remains the same as shown in Table1.7.

ted Value and Standard Deviation with two credit exposures

Expected value
(EV)
0
160,000
640,000

(Y - EV)

(Y - EV)^2* P

-800,000
-300,000
200,000

25,600,000,000
28,800,000,000
25,600,000,000
80,000,000,000
282,843

800,000

probability of .20 but using probability arithmetic this joint

There are two states of the world where one credit defaults and
2 = .32 and one state of the world where both credits are good
(.80 .80).

Original case
0.20

500,000
0%
0

What IF

Standard deviations at various probability of loss and various recovery rates

Recovery

Probability of Loss
282,843

0.05

0.20

0.90

0%

154,110

282,843

212,132

30%

107,877

197,990

148,492

60%

61,644

113,137

84,853