Consider the disruption risk due to floods in China discussed in Example 7.1. Us
ID: 3291010 • Letter: C
Question
Consider the disruption risk due to floods in China discussed in Example 7.1. Using the VaR disruption risk function developed in Table 7.9, compute the following risk measures:
(a) Probability that the annual loss due to floods will not exceed $3 million. (b) Maximum loss in a year due to floods at 80% confidence level.
(c) Probability that the annual loss due to floods exceed $4 million. (d) Probability that the annual loss is between $2 and $3 million.
TABLE 7.9 Distribution of Loss (in Dollars) due to Floods (Example 7.1) Percentile Percentile Percentile Percentile Loss oss Loss 74 1,794,852 1,781,395 1,753,989 1,732,442 4 1,634,668 1,583,325 1,509,111 1,505,201 1,497,237 1,493,229 1,432,587 1,330,984 1,314,882 1,303,204 1,295,468 1,288,498 1,281,809 1,251,826 1,229,143 1,203,298 1,195,368 1,120,779 1,109,613 1,091,191 1,072,811 1,069,418 1,032,636 180,416 157,818 25,071 5,132,621 4,331,860 3,898,051 ,843,777 71 3,520,809 3,235,638 2,800,572 2,690,496 2,655,008 2,587,499 2,523,289 2,483,131 2,366,726 2,333,488 2,311,285 2,126,165 2,059,962 2,017,960 2,015,964 2,006,971 55 1,941,751 1,938,188 1,926,715 1,896,053 1,838,048 98 902,77722 901,385 885,153 867,520 19 821,346 805,942 779,759 773,856 769,862 768,509 757,585 706,869 674,269 602,216 550,667 523,134 491,213 476,911 429,708 413,228 320,535 200,436 191,941 72 47 95 45 20 93 92 67 89 39 87 12 35 82 29 75 25Explanation / Answer
Let, X be the annual loss due to floods.
(A) Probability that the annual loss due to floods will not exceed $3 million
= P(X<3)
=0.93
(B) Maximum loss in a year due to floods at 80% confidence level.=90 percentile of the data=2587499$
(C) Probability that the annual loss due to floods exceed $4 million
=P(X>4)
=0.02
(D) Probability that the annual loss is between $2 and $3 million.
=P(2<X<3)
=0.93-0.80=0.13