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CREDIT RISK MODELS
What is a credit risk model in the context of banking?
A credit risk model is a quantitative tool used by banks to estimate the probability of default, loss given default, and exposure at default for a borrower or portfolio, aiding in risk measurement and capital allocation.
What is the Merton model in credit risk and what does it assume about firm assets?
Structural model treating firm equity as a call option on assets.
What does the term 'Probability of Default' (PD) signify in credit risk modelling?
PD represents the likelihood that a borrower will fail to meet their debt obligations within a specified time horizon, typically one year, and is a core parameter in IRB approaches under Basel II/III.
What does the term 'Distance to Default' (DD) measure in credit risk modelling?
Number of standard deviations asset value is from the default threshold.
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