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

An analyst is choosing between CreditRisk+ and CreditMetrics for a large portfolio of small retail loans where only default or no default matters and fast analytic results are needed. Which feature of CreditRisk+ best supports this choice?

CreditRisk+ best fits because it is a default-only actuarial model in which defaults are Poisson with stochastic default rates. Its loss distribution is obtained analytically through recursion, so no Monte Carlo is needed. It ignores rating migration and does not need asset values or equity prices.

  1. AIt requires Monte Carlo simulation of asset returns for each obligor
  2. BIt values loans using forward credit spreads after rating migration
  3. CIt uses a closed-form loss distribution from Poisson defaults with random default rates, so no simulation is requiredCorrect
  4. DIt requires an equity-price-based distance to default for each borrower

Explanation

CreditRisk+ is a default-mode actuarial model. Default counts are Poisson with mean default rates that vary with common sector factors (gamma), and the loss distribution is derived analytically using recursion. It ignores migration and needs no asset-return simulation.

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