An exposure has a default probability (PD) of 4.0% and loss given default of 50.0%. The standard deviation of the LGD is 25.0%. What is the ratio of the unexpected loss to the expected loss,UL/EL?
A. 1.33
B. 3.72
C. 5.50
D. 9.64
Answer:C
Unexpected loss (%) = SQRT [EDF * variance (LGD) + LGD^2 * variance (EDF)] =
SQRT [4%*25%^2 + 50%^2*4%*96%] = 11.00%
Expected loss (%) = EDF*LGD = 4%*50% = 2.0%.
Ratio of UL/EL = 11.0%/2.0% = 5.50