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FRM Part II · FRM Exam Part II · Credit Value at Risk

A risk analyst compares credit portfolio models. Which statement correctly describes a core feature of the CreditRisk+ framework?

CreditRisk+ is an actuarial model that treats the number of defaults as a Poisson process and does not model the economic cause of default. Asset-value barrier models and rating-migration revaluation belong to other frameworks, so they do not describe CreditRisk+.

  1. AIt models each obligor's asset value and defaults when asset value falls below a debt barrier
  2. BIt treats default as a random event with a Poisson-distributed number of defaults, without modeling the cause of defaultCorrect
  3. CIt revalues each loan after rating migrations using forward credit spreads
  4. DIt requires a time series of obligor equity prices to estimate default correlation directly

Explanation

CreditRisk+ is an actuarial, default-only model. It treats the number of defaults as Poisson-distributed (with a gamma-distributed mixing in sector versions) and does not model why default occurs. Asset-value barriers and migration revaluation describe Merton-type and CreditMetrics approaches.

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