Financial Risk Manager Part 1
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- A trainee analyst at a banking regulatory authority is participating in a course focused on the Vasicek model. While reviewing the equations associated with the model, the analyst comes across the following expressions:
Ui = aF + √(1-α²)zi
N⁻¹(PD) = aF
The default rate, expressed in terms of F, is provided by N(√(1-α²)).
- A trainee analyst at a banking regulatory authority is participating in a course focused on the Vasicek model. While reviewing the equations associated with the model, the analyst comes across the following expressions:
Ui = aF + √(1-α²)zi
N⁻¹(PD) = aF
The default rate, expressed in terms of F, is provided by N(√(1-α²)).
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A
The default probabilities of the individual loans in a portfolio are each mapped to the standard normal distribution Ui, of which values in the extreme right tail represent default.
16.0%
B
A low value of the factor F indicates that the economy is strong, while a high value of F represents economic weakness.
13.6%
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