Which of the following is not a parameter to be determined by the risk manager that affects the level of economic credit capital:

Which of the following is not a parameter to be determined by the risk manager that affects the level of economic credit capital:
A . Risk horizon
B . Confidence level
C . Probability of default
D . Definition of credit losses

View Answer

Answer: C

Explanation:

Three parameters define economic credit capital: the risk horizon, ie the time horizon over which the risk is being assessed; the confidence level, ie the quintile of the loss distribution; and the definition of credit losses, ie whether mark-to-market losses are considered in addition to default-only losses. The probability of default is not a parameter within the control of the risk manager, but an input into the capital calculation process that he has to estimate. Therefore Choice ‘c’ is the correct answer.