8008 Exam Dumps | Under the contingent claims approach to measuring credit risk, which of the following factors does NOT

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PRM Certification - Exam III: Risk Management Frameworks, Operational Risk, Credit Risk, Counterparty Risk, Market Risk, ALM, FTP - 2015 Edition
PRMIA.8008.v2021-08-28.q125
Question 22

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Question 22/125

Under the contingent claims approach to measuring credit risk, which of the following factors does NOT affect credit risk:

A. Cash flows of the firm

B. Maturity of the debt

C. Volatility of the firm's asset values

D. Leverage in the capital structure

Correct Answer: A

Explanation
Under the contingent claims approach, credit risk is modeled as the value of a put option on the value of the firm's assets with a strike equal to the face value of the debt and maturity equal to the maturity of the obligation. The cost of credit risk is determined by the leverage ratio, the volatility of the firm's assets and the maturity of the debt. Cash flows are not a part of the equation. Therefore Choice 'a' is the correct answer.

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