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FRM Part II · FRM Exam Part II · Portfolio Credit Risk

A risk analyst compares the CreditMetrics and CreditRisk+ frameworks for a bank's loan book. Which statement correctly describes a difference between the two models?

CreditMetrics is a mark-to-market model driven by rating migrations and asset-value correlations, while CreditRisk+ is an actuarial, default-only model using Poisson default counts. The other statements reverse or mix up these features of the two models.

  1. ACreditMetrics is a migration-based mark-to-market model, whereas CreditRisk+ is a default-only actuarial modelCorrect
  2. BCreditMetrics models only default events, whereas CreditRisk+ models rating migrations
  3. CCreditRisk+ requires a structural asset-value model, whereas CreditMetrics uses a Poisson default intensity
  4. DCreditRisk+ revalues each loan using forward credit spreads, whereas CreditMetrics uses a gamma-distributed default rate

Explanation

CreditMetrics uses rating transitions and revalues loans at the horizon, so it is mark-to-market. CreditRisk+ uses an actuarial approach with Poisson-distributed default counts and ignores migration. The other options swap the features of the two models.

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