Which of the following credit risk models relies upon the analysis of credit rating migrations to assess credit risk?

The correct answer is Choice 'b'. The following is a brief description of the major approaches

available to model credit risk, and the analysis that underlies them:

1. CreditMetrics: based on the credit migration framework. Considers the probability of migration to

other credit ratings and the impact of such migrations on portfolio value.

2. CreditPortfolio View: similar to CreditMetrics, but adds the impact of the business cycle to the

evaluation.

3. The contingent claims approach: uses option theory by considering a debt as a put option on the

assets of the firm.

4. KMV's EDF (expected default frequency) based approach: relies on EDFs and distance to default as

a measure of credit risk.

5. CreditRisk+: Also called the 'actuarial approach', considers default as a binary event that either

happens or does not happen. This approach does not consider the loss of value from deterioration in

credit quality (unless the deterioration implies default).