Answer: The CreditMetrics model uses the outcomes of many simulation trials to generate a distribution of credit losses on the loan.

## Explanation **A is correct.** In CreditMetrics, a Monte Carlo simulation is carried out to model how the ratings of loans in a portfolio change during the year. The model generates multiple simulation trials to create a distribution of potential credit losses. **B is incorrect.** On each simulation trial, a number is sampled from a standard normal distribution, not a uniform distribution. Specifically, each probability in the table is mapped to a range of critical values of the standard normal distribution, and the sampled value is compared to these ranges to determine the year-end rating. **C is incorrect.** The bank's portfolio of loans is valued at the beginning of a one-year period. In each simulation trial, the ratings of all borrowers at the end of the year are determined, and the portfolio is revalued. The credit loss is calculated as the value of the portfolio at the beginning of the year minus the value of the portfolio at the end of the year. **D is incorrect.** CreditMetrics is the model banks often use to determine economic capital; the Vasicek model is often used by regulators to determine regulatory capital.

Author: LeetQuiz .