FRM: Credit risk

Explanations, applications and practice for credit risk.

• Loss given default: understanding conditional severity

  Distinguish LGD, recovery and expected loss in a simple credit example.

  Concepts

• Default probability and credit loss severity

  Separate the likelihood of default from the loss conditional on default.

  Lessons

• Credit-loss component practice

  Distinguish probability, conditional loss severity and exposure.

  Practice
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  Expected credit loss calculator

  Explore the simple PD × LGD × EAD loss model.

  Tools

• Expected credit loss from a two-outcome table

  Derive PD × LGD × EAD from explicit default and non-default outcomes.

  Worked examples