You are *uating the credit risk in a portfolio comprised of Loan A and Loan B. In particular, you are interested in the risk contribution of each of the loans to the unexpected loss of the portfolio. Given the information in the table below, and assuming that the correlation of default between Loan A and Loan B is 20%, what is the risk contribution of Loan A to the risk of the portfolio?
A. USD 39,587
B. USD 62,184
C. USD 96,794
D. USD 120,285
Answer：B
Risk contribution is a critical risk measure for assessing credit risk. The risk contribution of a risky assets “RC” to the portfolio unexpected loss, is defined as the incremental risk that the exposure of a single asset contributes to the portfolio’s total risk. Mathematically:
RCA = (ULA2 + p×ULA×ULB)/ULp
UL = AE×sqrt ( EDF×VAR LGD+ LGD2×VAREDF). Therefore:
ULA = 3,000,000×sqrt (1.5%×20%2 + 30%2 ×7%2 ) = 96,793.59
ULB = 2,000,000×sqrt (3.5%×30%2 + 45%2 ×12%2) = 155,769.06
ULP = sqrt(96793.592 + 155,769.062 + 2×20%×96,793.59×155,769.06) = 199,158.17
RCA = (96,793.592 + 20%×96,793.59×155,769.06) / 199,158.17 = 62,184.19