In the Longstaff and Rajan Top-Down Correlated Default Model,assume That $$L _ { t }$$

question 15

Multiple Choice

In the Longstaff and Rajan top-down correlated default model,assume that losses $$L _ { t }$$ in a credit portfolio are given by the following dynamic process in a one-factor setting: $$\frac { d L _ { t } } { 1 - L _ { t } } = \gamma d N ( \lambda )$$ where $$\gamma$$ is a fractional loss (of the current portfolio value) that occurs every time there is a default,assumed to be generated by a Poisson process $$N$$ with loss arrival rate $$\lambda$$ (a constant) .What is the expected loss of a $100 portfolio in a year if $$\gamma = 0.01$$ and $$\lambda = 2$$ ?

• A)$1.5
• B)$2.0
• C)$2.5
• D)$3.0

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