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

A risk analyst compares CreditMetrics with CreditRisk+ for a portfolio of small corporate loans. Which statement correctly describes a core feature of CreditRisk+?

CreditRisk+ is an actuarial default-only model. It treats the number of defaults as Poisson-distributed and ignores rating migration and asset-value dynamics. Revaluation after migration belongs to CreditMetrics, and asset-value links belong to structural models, so the Poisson default-frequency description is the correct one.

  1. AIt models default only, using a Poisson-type frequency of defaults with no link to the firm's asset valueCorrect
  2. BIt values each loan by revaluing it after a rating migration
  3. CIt requires a Monte Carlo simulation of asset returns for every obligor
  4. DIt assumes the default probability of each obligor is driven by the firm's equity volatility

Explanation

CreditRisk+ is an actuarial, default-only model that treats the number of defaults as Poisson-distributed and does not model rating migration or asset values. Revaluation after migration is CreditMetrics, and asset-value or equity-volatility links are structural models such as Merton/KMV. CreditRisk+ is solved analytically, not by simulation.

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