VRM 4. Credit Ratings: LOs

a) Describe external rating scales, the rating process, and the link between ratings and default.

b) Describe the impact of time horizon, economic cycle, industry, and geography on external ratings.

c) Define and use the hazard rate to calculate the unconditional default probability of a credit asset.

d) Define recovery rate and calculate the expected loss from a loan.

e) Explain and compare the through-the-cycle and point-in-time internal ratings approaches.

f) Describe alternative methods to credit ratings produced by rating agencies.

g) Compare external and internal ratings approaches.

h) Describe and interpret a ratings transition matrix and explain its uses.

i) Describe the relationships between changes in credit ratings and changes in stock prices, bond prices, and credit default swap spreads.

j) Explain historical failures and potential challenges to the use of credit ratings in making investment decisions.

VRM 5. Country Risk: LOs

a) Identify sources of country risk.

b) Explain how a country’s position in the economic growth life cycle, political risk, legal risk, and economic structure affects its risk exposure.

c) Evaluate composite measures of risk that incorporate all major types of country risk.

d) Compare instances of sovereign default in both foreign currency debt and local currency debt and explain common causes of sovereign defaults.

e) Describe the consequences of sovereign default.

f) Describe factors that influence the level of sovereign default risk; explain and assess how rating agencies measure sovereign default risks.

g) Describe the characteristics of sovereign credit spreads and sovereign credit default swaps (CDS) and compare the use of sovereign spreads to credit ratings.

VRM 6. Credit Risk: LOs

a) Evaluate a bank’s economic capital relative to its level of credit risk.

b) Explain the distinctions between economic capital and regulatory capital and describe how economic capital is derived.

c) Identify and describe important factors used to calculate economic capital for credit risk: probability of default, exposure, and loss rate.

d) Define and calculate expected loss (EL).

e) Define and explain unexpected loss (UL).

f) Estimate the mean and standard deviation of credit losses assuming a binomial distribution.

g) Describe the Gaussian copula model and its application.

h) Describe and apply the Vasicek model to estimate default rate and credit risk capital for a bank.

i) Describe the CreditMetrics model and explain how it is applied in estimating economic capital.

j) Describe and use the Euler’s theorem to determine the contribution of a loan to the overall risk of a portfolio.

k) Explain why it is more difficult to calculate credit risk capital for derivatives than for loans.

l) Describe challenges to quantifying credit risk.