It Is Assumed That a Company Can Default After One

question 15

Multiple Choice

It is assumed that a company can default after one year or after two years.The probability of default at each time is 1.5%.The present value of the expected loss to a bank on a derivatives portfolio if the company defaults after one year is estimated to be $1 million.The present value of the expected loss if it defaults after two years is estimated to be $2 million.Which of the following is the bank's CVA ?

• A) $3,000,000
• B) $300,000
• C) $45,000
• D) $150,000

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Definitions:

Ongoing Basis

A continuous or regular manner of operation or occurrence.

Direct Observation Technique

A method of data collection where behaviors or events are recorded by an observer as they happen, without reliance on subject self-reports.

Vertical Axis

In graphing, the y-axis, which is typically used to represent the range of values of the variable being measured.

Horizontal Axis

In graphing, the horizontal line along which the values of one variable are plotted, often representing the independent variable or time.