Module: | MODULE B: RISK MANAGEMENT
Q381: Consider the following statements regarding Credit Value at Risk (Credit VaR) as a portfolio measurement tool:
1. Credit VaR measures the maximum expected credit loss over a specified target horizon within a given confidence interval.
2. A higher confidence interval percentage will mathematically result in a lower Credit VaR figure.
3. Credit VaR specifically estimates the standard Expected Loss (EL) rather than capturing the extreme tail-end Unexpected Loss (UL).
Which of the statements given above is/are correct?
2. A higher confidence interval percentage will mathematically result in a lower Credit VaR figure.
3. Credit VaR specifically estimates the standard Expected Loss (EL) rather than capturing the extreme tail-end Unexpected Loss (UL).
Which of the statements given above is/are correct?
✅ Correct Answer: A
The correct answer is A. Statement 1 is correct: Credit VaR is a fundamental risk metric that estimates the worst-case potential loss of a credit portfolio over a defined target horizon (e.g., 1 year) at a specific confidence level (e.g., 99.9%). Statement 2 is incorrect: The mathematical nature of VaR means that increasing the confidence interval (moving further into the extreme tail of the distribution, from 99% to 99.9%) will inherently result in a HIGHER VaR figure, not a lower one, because it demands protection against more extreme, rare events.
Statement 3 is incorrect: Credit VaR is specifically designed to measure the tail-end risk, which represents the Unexpected Loss (UL). It does not merely estimate standard Expected Loss (EL).
Statement 3 is incorrect: Credit VaR is specifically designed to measure the tail-end risk, which represents the Unexpected Loss (UL). It does not merely estimate standard Expected Loss (EL).