Will Durant

04-29-2008, 02:13 PM

The official solution to this question doesn't make sense to me.

Transition matrix from BB to other ratings is given as:

AA - 1%

A - 2%

BB - 95.75%

B - 0.75%

C - 0.5%

Part b asks "Calculate the credit VaR at the 99% confidence level."

There is only a 0.5% chance that the bond will be rated C; there's a 99.5% chance that the bond will be rated B or higher.

Therefore, I would expect the correct answer to be

99% VaR = Value of BB bond - Value of B bond

But the SOA solution (and Carmody) give the answer as

99% VaR = Value of BB bond - Value of C bond

Does anybody understand this?

ETA - I can't believe this crap is my 5000th post! I hate the APM exam!! Down with the SOA!!!

Transition matrix from BB to other ratings is given as:

AA - 1%

A - 2%

BB - 95.75%

B - 0.75%

C - 0.5%

Part b asks "Calculate the credit VaR at the 99% confidence level."

There is only a 0.5% chance that the bond will be rated C; there's a 99.5% chance that the bond will be rated B or higher.

Therefore, I would expect the correct answer to be

99% VaR = Value of BB bond - Value of B bond

But the SOA solution (and Carmody) give the answer as

99% VaR = Value of BB bond - Value of C bond

Does anybody understand this?

ETA - I can't believe this crap is my 5000th post! I hate the APM exam!! Down with the SOA!!!