Question: Value at Risk methods can be used with respect to the likelihood of changes in credit risk over time. Firstly, explain the background to this

Value at Risk methods can be used with respect to the likelihood of changes in credit risk over time. Firstly, explain the background to this technique and how it can be applied within the context of credit migration data published by CRA's. Secondly, illustrate, using different potential ratings outcomes for a specified three-year bond, how one might be able to calculate the Credit VaR for this bond at the 99% confidence level over a one-year time horizon. Thirdly, discuss why using a parametric approach for calculating the Credit VaR from ratings migration will be flawed. Fourthly, discuss why interpolation will provide a more accurate assessment of the VaR than a purely parametric approach to the calculation

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