FRM Part II · FRM Exam Part II · Credit Risk
Under the foundation concepts of credit risk, which event is best described as migration risk rather than default risk?
Migration risk is the loss in a credit exposure's value caused by a deterioration in credit quality, such as a downgrade from A to BBB, without any default occurring. Missed payments, bankruptcy and settlement failures are default-type events.
- AA borrower is downgraded from A to BBB, reducing the loan's market value without defaultCorrect
- BA borrower misses a coupon payment beyond the grace period
- CA counterparty fails to deliver securities on settlement date
- DA borrower files for bankruptcy protection
Explanation
Migration risk is the risk of loss in value from a change in credit quality (rating change) short of default. The other options describe default or settlement failure events.
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