In the Longstaff and Rajan Top-Down Correlated Default Model, Assume $L _ { 4 }$

question 16

Multiple Choice

In the Longstaff and Rajan top-down correlated default model, assume that losses $L _ { 4 }$ 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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