Practice Question Set: Measuring Credit Risk

Chapter 6. Credit Risk and Capital Modeling Practice Question contains 23 pages covering the following learning objectives:

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

* Explain the distinctions between economic capital and regulatory capital, and describe how economic capital is derived.*

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

* Define and calculate expected loss (EL).

* Define and explain unexpected loss (UL).

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

* Describe the Gaussian copula model and its application.

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

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

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

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

* Describe challenges to quantifying credit risk.

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