Measuring Credit Risk (FRM Part 1 2025 – Book 4 – Chapter 6)
Measuring Credit Risk is a core topic in FRM Part 1 (Book 4 – Valuation and Risk Models). In this lecture, Professor Forjan explains economic vs regulatory capital, expected vs unexpected loss, and advanced models like the Gaussian Copula, Vasicek Model, CreditMetrics, and Euler’s Theorem. These tools help financial professionals evaluate loan portfolios, estimate default probabilities, and manage credit risk effectively.
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What you’ll learn in this video:
Distinction between economic capital and regulatory capital
How to calculate expected and unexpected losses
Gaussian Copula model and correlation in defaults
Vasicek model for credit portfolio risk
CreditMetrics model and Monte Carlo simulations
Euler’s Theorem and its application in risk attribution
Measuring credit risk capital for derivatives
📌 Perfect for FRM candidates and finance professionals aiming to master risk management concepts.
0:00 Introduction
1:18 Learning Objectives
2:18 Distinction between Economic Capital and Regulatory Capital
9:38 Unexpected Loss
20:38 Mean and Standard Deviation of Credit Losses
24:03 The Gaussian Copula Model
28:08 One-Factor Correlation Model
36:56 Credit Metrics Model
39:36 Euler's Theorem
45:28 Credit Risk Capital for Derivatives
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