Details

This is an individual assignment.  If you need assistance, my associate and I are available through normal channels.

Assessment

The entire assignment is worth ten points and the points for each question are listed.  Correct answers, while important, are not as important as correct analysis.  Show your work.  More credit will be given for correct analysis than for correct final numbers.  Conversely, missing analysis or incorrect analysis will be more heavily deducted than incorrect final numbers.

Submission

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Directions

For each question, please provide both the analysis (equations and/or verbal thought processes) and final equations.

1.   ( 1 pts) Going into a bad credit cycle, with elevated PDs, do you expect the LGDs to be:

a.    Relatively better than average

b.    Relatively worse than average

c.    About average

d.   Not enough information has been provided.

2.   (2 pts) Suppose as a Risk Manager, you have been asked to assess the capital impact of 2 portfolios.  Portfolio A has assets that consist of $500M of US Treasury Bonds (assume    the best country rating), $200M of B+ Corporate Loans, $800M of residential mortgages. Portfolio B has assets that have $200M of Fannie Mae Bonds (has the implicit guarantee of the US Government), $800M of A rated Corporate Loans, and $100M of residential mortgages.  Provide the Capital requirement for both portfolios (assume Basel 2, and use the table given below).