Credit Value at Risk (FRM Part 2 – Book 2 – Credit Risk Measurement and Management – Ch 10)
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After completing this reading, you should be able to:
Compare market risk value at risk (VaR) with credit VaR in terms of definition, time horizon, and tools for measuring them.
Define and calculate credit VaR.
Describe the use of rating transition matrices for calculating credit VaR.
Describe the application of the Vasicek model to estimate capital requirements under the Basel II internal-ratings-based (IRB) approach.
Interpret the Vasicek’s model, Credit Risk Plus (CreditRisk+) model, and the CreditMetrics ways of estimating the probability distribution of losses arising from defaults as well as modeling the default correlation.
Define credit spread risk and assess its impact on calculating credit VaR.