A German Bank lends 100M DEM to a Russian bank for one year and receives 120M DEM worth of Russian government securities as collateral. Assuming that the 1-year 99% VaR on the Russian government securities is 20M DEM and the Russian bank’s 1-year probability of default is 5%, what is the German bank’s probability of losing money on this trade over the next year?
A. Less than 0.05%
B. Approximately 0.05%
C. Between 0.05% and 5%, it is exactly 5%
D. Greater than 5%
