Dear David,
I’ve have struggling with the following question from FRM practice and past exams. Appreciate your kind help on this!
5) On Correlation of default (FRM Exam 2001, question 25)
What can be said about default correlations in Creditmetrics?
Answer provided: Default correlations can be estimated by rating changes. Transition matrix is the source of correlations.
My question: This answer seems to be contradicting with FRM handbook (5th edition) section “Correlations among Defaults” page 574, where the books says that Correlations among defaults are inferred from correlations between asset values…. In turn are taken from correlations across equity indices… Each obligor is mapped to an industry and geographical sector, …, correlations are inferred from the co-movements of the common risk factors…
How to reconciliate the difference and contradiction in these two statements?
On Cutoff Values for Simulation in CreditMetrics (FRM handbook 5th edition, section “Correlations among Defaults” page 573-4)
I don’t understand how the Creditmetrics makes use of cutoff values z in its simulation. How does z comes into play in Creditmetrics? Can you please explain?
Thank you for your enlightenment and correction!
Cheers
Liming
10/11/09
I’ve have struggling with the following question from FRM practice and past exams. Appreciate your kind help on this!
5) On Correlation of default (FRM Exam 2001, question 25)
What can be said about default correlations in Creditmetrics?
Answer provided: Default correlations can be estimated by rating changes. Transition matrix is the source of correlations.
My question: This answer seems to be contradicting with FRM handbook (5th edition) section “Correlations among Defaults” page 574, where the books says that Correlations among defaults are inferred from correlations between asset values…. In turn are taken from correlations across equity indices… Each obligor is mapped to an industry and geographical sector, …, correlations are inferred from the co-movements of the common risk factors…
How to reconciliate the difference and contradiction in these two statements?
On Cutoff Values for Simulation in CreditMetrics (FRM handbook 5th edition, section “Correlations among Defaults” page 573-4)
I don’t understand how the Creditmetrics makes use of cutoff values z in its simulation. How does z comes into play in Creditmetrics? Can you please explain?
Thank you for your enlightenment and correction!
Cheers
Liming
10/11/09
