How to Compute Unexpected Loss?| Why Financial Risk Manager is Important?| FRM Tutorials Video Lecture | Risk Management: An Essential Training - Management

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financial risk manager frm part 1 of the
frm exam covers the fundamental tools
and techniques used in risk management
and the theories that underlie their use
unexpected loss
welcome to the 50th session in your
preparation for the frm part 1 exam in
this session we will learn about
unexpected loss or the unanticipated
loss from a loan which increases during
default or credit migration unexpected
loss denotes the variation in the asset
value
agenda the main agenda of our discussion
in this short session will be to study
the concept of unexpected loss and
derived a mathematical relationship for
the calculation of unexpected loss we
will also learn how economic capital is
used to cover unexpected loss
unexpected loss in an earlier session we
have learned about unexpected loss which
gives the potential loss in value of a
portfolio but does not capture the
variation in the value of the risky
asset this means that while most of the
assets do not default the asset that
default results in a huge loss which is
not captured by the expected loss that
is the actual loss can be much larger
than the expected loss the measure of
this situation is called unexpected loss
it captures the variation in the value
of the risky asset over a horizon the
mathematical expression for the
unexpected loss is given in the slide
which is a function of adjusted exposure
multiplied by a factor which is
dependent on default probability loss
given default and their variances
competing unexpected loss let us learn
to calculate unexpected loss through an
example this example gives the value of
total commitment outstandings loss given
default expected default frequency their
variances and draw down at default using
the expression for adjusted exposure
from the previous session we get the
value of adjusted exposure as 90
thousand dollars using this value in the
expression for unexpected loss we get
the value of three thousand six hundred
and forty dollars as the unexpected loss
the expected loss is calculated as 900
which is far less than the unexpected
loss as calculated in this line
economic capital we find that the value
of unexpect