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

---

Definitions:

Brushes

Components made of conductive material that transmit electrical current between stationary wires and moving parts, often found in motors and generators.

Commutator

A rotary electrical switch in certain types of electric motors and generators that periodically reverses the direction of current flow through the rotor.

AC Generator

An alternator in a vehicle that converts mechanical energy into alternating current electricity to power electrical systems.

Diodes

Semiconductor devices that allow current to flow in one direction, often used in electronics to rectify, switch, or modulate signals.