RSK 4804 Credit Risk Management (RSK4804) Assignment 01 Solutions 2024.

Dear Student, The following solutions are for Assignment 01 only. Solutions for Assignment 02 will be released shortly after the due date for Assignment 02 as Tutorial Letter 201 incorporating examination information. We hope you find this information value adding. Best wishes. Dr. J. Chisasa Senior Lecturer Question 1 Explain Probability of default and briefly discuss its uses. (10) Suggested solution It is a statistical percentage probability of a borrower defaulting√ and it is directly linked to credit grades √ Uses • Quantification of credit risk √ PD facilitates distinguishing the credit risk of different asset classes in a portfolio and judging the credit worthiness of the obligor. √ • Allocation of capital√ if the probability of default is high capital allocation is also high √ • Better credit risk pricing√. - higher probability of default (PD) means higher risk of default which means the risk premium has to be higher for example PD is the major risk driver in pricing credit default swaps √ • Client selection √ scientific study is used to derive PD using internal and external data by rating agencies. The information from rating agencies is used by financial firms as a benchmark in client selection√. • Credit quality √ it provide an insight into credit quality and enables better monitoring of high risk customers √