Skip to content

FRM Part II · FRM Exam Part II · Credit Scoring and Rating

A credit analyst is reviewing how agencies treat issuer-specific versus sovereign factors when assigning a corporate rating to a company operating in an emerging market. Which statement reflects the typical agency methodology?

Agencies typically treat the sovereign rating as an effective ceiling for domestic corporates, but they can rate a firm above its sovereign if it has strong offshore hard-currency earnings and structural protections against transfer and convertibility risk. The cap is therefore a strong tendency, not an absolute rule.

  1. AThe corporate rating is always capped at the sovereign rating, with no exceptions in any circumstances
  2. BThe sovereign rating is ignored because corporate default risk depends only on firm-level cash flows
  3. CThe sovereign rating is often a ceiling, but agencies may rate a firm above its sovereign when it has strong offshore revenues, hard-currency assets and structural protections against transfer and convertibility riskCorrect
  4. DThe corporate rating is set equal to the sovereign rating minus a fixed number of notches

Explanation

Sovereign risk is a key influence and usually acts as a ceiling, but agencies may pierce it where the firm has offshore cash flows or structural protections. A rigid cap or fixed-notch rule is not how agencies operate, and ignoring the sovereign is wrong.

Did you get it right without looking?

One question tells you little. A timed set on Credit Scoring and Rating shows your real accuracy, how long you take and where you lose marks.

Practise Credit Scoring and RatingFree diagnostic mock

More Credit Scoring and Rating questions