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

In CreditRisk+, exposures are grouped into bands of similar size before the loss distribution is computed. What is the main purpose of this banding?

Banding groups exposures into bands that are integer multiples of a common unit of loss, which makes the portfolio loss distribution computable through a recursive algorithm. It is a tractability device and does not address migration, default rate volatility or correlation.

  1. ATo convert exposures into rating-migration probabilities
  2. BTo make the loss distribution tractable by treating exposures within a band as a common multiple of a unit lossCorrect
  3. CTo eliminate the need for default rate volatility
  4. DTo ensure that default correlation between obligors equals zero

Explanation

Banding rounds exposures (net of recovery) to multiples of a base unit, so losses are integer multiples and the loss distribution can be computed by recursion (Panjer). It does not model migration, remove default rate volatility, or set correlation to zero.

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