# Questions tagged [credit-risk]

The risk that a borrower will default on any type of debt by failing to make required payments and that the corresponding lender suffers a loss.

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29 views

### What is the meaning of Leverage ratio consuming business

Leverage ratio (LR) is defined by the ratio between Tier-1 capital and total exposure (off and on balance-sheet exposure), which does not consider credit-worthiness. It is said that: [loans to] ...
51 views

### Through-the-cycle rating transition matrix

Suppose we know the observed transition matrix for annual migrations between credit ratings, $T_{ij,t}$, for $N$ years. How is the through-the-cycle (TTC) transition matrix defined? Sometimes the ...
33 views

### Understanding the application of Asset-Correlation to credit risk models

Suppose we have a portfolio of $n$ credits. In order the estimate the Portfolio Value at Risk (99,9) we use a standard vasicek model with the Ability to pay variable $A_i=\sqrt{\rho}x+\sqrt{1-\rho}z_i$...
41 views

### How to construct the probability of default (PD) with not much historical data (<1 year)?

If a financing company has a new funding program, is there a statistical method that can be used to construct a probability of default (PD) for IFRS 9 ECL calculation purposes? Considering that ...
144 views

### Long term average of transition matrix

Some companies publish historic yearly/quarterly transition metrics for credit rating transitions such as the "Credit Rating Transition and Default Study 2021" by Kula and Bourin from Scope ...
59 views

### LGD formula with collateral and recovery rate

I am trying to calculate Loss Given Default including both collateral and recovery rate but I haven't found a formula yet to incorporate both. formulas I've come across: LGD (as percentage) = 1 - (...
1 vote
70 views

### Multiple credit risk mitigation (CRM) treatment in RWA calculation in F-IRB approach Basel II

I have a confusion about how to calculate RWA for a exposure with many types of CRM (says, collaterals and guarantee) in IRB approach. In BCBS128, point 206, "In the case where a bank has ...
79 views

### Where to find historical data on corporate credit ratings

I am looking for a parsed dataset with historical data for company credit ratings. I know NRSROs need to make their historical data public. I found Moody's (https://ratings.moodys.com/sec-17g-7b), S&...
39 views

### Margin call calculation question

Here are the figues of day 1 quoted from source and I wonder if my hypothetical day 2 figures are correct if the mtm exposure became 15,000,000 on day 2 with no new trades. (IA amount being the same) ...
1 vote
55 views

### Segregated margin call question

What means segregated margin call and non-segregated margin call in the example. Why it is calculated that way？ Thank you. https://www.google.com/url?sa=t&source=web&rct=j&url=https://www....
83 views

### How the margining system worked in this situation?

In Section 2.5 of Options, Futures, and Other Derivatives (8th edition), there is a paragraph discussing the credit risk associated with the operation of margins: The whole purpose of the margining ...
127 views

### Is there anyway to convert the cumulative loss rate of vintage to annualised loss rate?

When evaluating loan performance, one method is using vintage. Historical losses are tabulated by loan year, for example, and loan age, as a percentage of origination balances by the loan year. So, ...
1k views

### the difference between CS01 and RS 1%

Please tell me the difference between CS01 and RST 1% (Relative spreads tightening by 1%) and how these two are used to monitor the credit flow traded product's exposures. Why would you use the spread ...
250 views

### The difference between Credit Curve and CDS Curve

What's the difference between the credit curve and the CDS curve? Can I read the CDS curve from the Bloomberg terminal? for both single name and index? Also, can someone please explain the difference ...
1 vote
124 views

### Does Gordy Formula measure default risk & downgrade risk?

The Gordy Formula used for measuring Credit Risk as proposed in Basel Rules is based on the asymptotic single risk factor model. It is derived from a Merton Model. The Merton Model only knows to stati,...
155 views

### How to create/define concentration risk limits for credit portfolios

How do you create/define concentration risk limits for credit portfolios? I've seen a lot of recommendation for HHI for example, but how do I define what is high or low concentration? The idea of the ...
83 views

### Strange calculation for Credit risk [closed]

One of the measures to quantify credit risk is to calculate the Expected loss, which is typically quantifies as $EL = EAD \times PD \times LGD$ However, I have come across a somewhat strange ...
1 vote
68 views

### Estimating credit transition probabilities from additional information

Let say $P_{i,j}, j = 1,2,3, DEF$ are the probabilities of transitions from an initial rating $i$ to rating $j$, where $P_{i, DEF}$ represents the default probability from that initial rating. Now let ...
62 views

### Efficient encoding technique for credit ratings

Is there any categorical encoding technique for credit ratings that take into account the kind of non linear nature of the notches of the credit ratings? The literature standard is the ordinal one ...
1 vote
29 views

### Why do some TIPS bonds have credit spread < 0 [duplicate]

If we look at the yield spreads on Bloomberg of some TIPS bonds, we see they have credit spread < 0 (i.e. their yield is even lower than their benchmark treasury bonds) Why is that the case. ...
1 vote
185 views

### Why investment grade floor is set at Baa3/BBB-?

I have studied methodologies for Moody's and S&P ratings but haven't seen any instance where the respective agencies have mentioned the reason choosing Baa3/BBB- as the dividing line between ...
80 views

### Credit rating of an Issuer

When analysing historical movements of credit rating, sometime credit rating is put as Non-rated or NR. Is there any industry ...
158 views

### Bond value as a function of spread change and duration/maturity

I am trying to calculate the change of value in a universe of bonds given a series of shocks to the credit spread of each bond. As a constraint, the initial dataset only contains the spread change for ...
1 vote
138 views

### Help with simple derivation of probability of credit default

I'm going over a chapter in Hull's Options, Futures, and Other Derivatives and am stuck on how the probability of default is derived. Here's the image of the derivation. I can follow all of it except ...
1 vote
629 views

### Relationship between risk free rate and credit spread in the Merton model

Based on Merton model of credit risk, I understand that investing in a risky debt is the same as buying a treasury bond and writing a put option on the firm's assets with a strike price equal to the ...
1 vote
105 views

### Credit loss data (discounted)

I am looking into a data provider which provide the credit loss data from different banks - https://globalcreditdata.org/interactive-dashboard/ They also provide ...
1 vote
208 views

### How does the bank uses the provisioning amount and RWA based capital adequacy

As I am new to the banking risk management, I need some clarity on the concept of provisioning and capital adequacy with respect to banking industry. As the banks make loans and some of these loans ...
345 views

### Time series data for probability of default (or credit ratings)

I'm currently investigating potential correlations among ESG ratings and credit ratings; more in particular, i'm trying to understand whether such correlation evolved during the last 20 (?) years, and ...
124 views

I'm a software developer want to know a little about quant basics. My undserstanding of PFE is that a PFE of a trade at a future time point is commonly defined by taking the average of the highest (or ...
1 vote
113 views

### Calculation of Total Credit Risk Capital % but seeing lower capital percentage for higher risk band. Is there any correction required?

I am trying to calculate the Total Credit Risk capital % for my learning purpose as given below. Assuming adding 1 single loan with different pds. i have noticed one point in the table and have two ...
61 views

### pooling equilibrium

I was hoping for some help on how to answer a question about pooling equilibrium. Suppose a bank wants to give loans of 1 million dollars to people, but it cannot differentiate between high risk ...
1 vote
239 views

### How do I estimate the factor sensitivity in a Vasicek Single Factor Model?

I understand the formula of an asset return for an obligor i is given by the following: $$A_i = \sqrt{w_i}*Z + \sqrt{1-w_i}*\epsilon_i$$ My question is - How do I calculate $w_i$? I have the PD, LGD ... 435 views

### How to account for the credit spread ( e.g. LIBOR + 2%) when using the Multicurve Methodology in valuing a Swap

When valuing an Interest rate swap, counterparties will typically issue the contract at a Libor + credit premium, e.g. Libor +2%. When valuing a swap, we require a LIBOR forward curve and Discounting ...
2k views

### Risky PV01 Vs CS01 for Credit Derivatives

Can someone please tell if there is a difference between CS01 and Risky PV01 of CDX or CDX Index Options ? Someone told me that they are technically equal only when Par Spread is equal to Standard ...
921 views

### Does credit default swaps have interest rate duration and credit duration?

Will a CDS have interest rate duration and credit duration? It does seem likely that the value of the CDS would depend on the underlying interest rate, or the spread. But when I try to Google this I ...
33 views

### Default rate short majurity

What is the best way of measuring default rates for a portfolio which contains mostly loans which are either 30, 60 or 90 days term? Normally I use the following methodology Look at all loans which ...
342 views

### A list of the 01's in the corporate bonds

I have frequently heard terms like DV01, CV01, PV01. Where can I get a list of these glossaries to study? I am not looking for a detailed explanation, just really a list.. Once I have the list, I can ...
79 views

### Liquid products/indexes to hedge/price a corporate bonds portfolio

Generally, for a corporate bonds portfolio, what are the common risk factors that's hedge-able through some liquid products? I know we can hedge the rate-risk through treasuries. We have some ETFs for ...
1 vote
2k views

### CDS spread changes with its recovery rate

Not sure if my question makes any sense because I'm pretty new to the credit market. Suppose I have a 5Y CDS spread which is quoted as 100 bps with 40% recovery rate. So, if I want to estimate another ...
375 views

### Dependence between Credit Default Risk and Credit Spread Risk

I am trying to understand the difference and similarities between Credit Spread Risk and Credit Default Risk. Here is brief (and not all too precise) definition. Credit Spread Risk: Losses due to ...
349 views

### Why the increase of presumed recovery rate will increase the implied default probability?

From Hull's paper, the implied default probability (lambda) = credit spread/(1-recovery rate). Therefore, we can infer that, as the recovery rate goes up, the lambda will also go up. Why is that? I ...
337 views

### Why do we need to split market and default information into 2 separate filtrations?

The reduced-form approach to modelling derivatives with credit risk normally assumes the existence of two filtrations: A market filtration $(\mathscr{F}_t)_{t\geq0}$ carrying market and economic ...
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### Variables for retail lending of bank

Typically to estimate the credit-worthiness of customers in retain bank lending, banks generally consider many demographic and socio-economic variables most importantly - Age, number of dependents, ...
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### Why do bank stock returns increase from increased credit risk?

As part of my bachelor's thesis, I am running the following regression on daily bank excess returns: (r-rf)=Beta * Market excess return + Beta * Level(5Y)+ Beta * Credit Risk + error Level(5Y) is the ...
186 views

### Regression analysis in finance - book recommendation

Hey I am looking for a good book about regression analysis in finance (e.g. credit risk). Could you recommend something? It would be great if this book will be connected with some programmic language ...
137 views

### Generalized Linear Mixed Model (GLMM) for the probability of default of corporates

I work in the financial industry and we want to implement an internal rating model for our clients (think corporates large or mid , banks etc. some listed on an exchange some others not). We want to ...
1 vote
189 views

### Observed rating migration matrix to derive the generator matrix

I am doing some reading on the derivation of credit rating migration/transition matrices and probability of default term structures. I understand that a homogeneous Markov chain can be either discrete-...
1 vote
424 views

### Calculation of the Probability of Default

I am reading a book from Tiziano Bellini namely IFRS 9 and CECL Credit Risk Modelling and Validation, to understand the default probability calculation (link : https://www.sciencedirect.com/science/...
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The price for a simple credit bond, where a credit event is modeled as the first jump of a Poisson process $N$, with stochastic hazard rate $\lambda$, is given by $$P_t = P(t, \lambda, N)$$ such that, ...