VWL / Lektion

Models for predicting Sovereign Risk and Exchange Rate Risk

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Part 3 Theorie

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  • What do rating agencies provide?
    An independent opinion on the default risk of a debtor --> on the capacity of a debtor (issuer of a bond) to meet his obligations fully & on time.
  • What do rating agencies evaluate?
    The creditworthiness of all organizations which issue debt in public markets --> The debt of: -Corporations & nonprofit organizations -Governments -Securitized assets (assets that are bundled together and sold as a security to investors)
  • What is the problem with the models of rating agencies?
    They use models which are not fully dislosed to the public -->Agencies are private companies that want to preserve their advantages which they could lose if they disclose their methodology to the public. -->Usually paid by bond-issuer --> closeness to issuer --> conflict of interests possible
  • Which are the three most important rating agencies?
    Standard & Poors (market share about 40%), Moody's (35%), Fitch (15%).
  • What are the rating categories of S&P?
    AAA, AA, A, BBB (Investment grade, safe) BB, B, CCC, CC, C (Speculative Grade, higher likelihoog of default/not getting repaid) D (Speculative Grade) +/- shows relative standing within the category
  • What are the rating categories of Moody's?
    Aaa, Aa, A, Baa (Investment grade, safe) Ba, B, Caa, Ca, C (Speculative grade, higher likelihood of default/not getting repaid) D (speculative grade) 1, 2, 3 shows relative standing within the category.
  • What are the Broad Rating Factors in the rating methodology of Moody's?
    Factor 1: Economic Strength Factor 2: Institutional Strength Factor 3: Fiscal Strength Factor 4: Susceptibility to Event Risk
  • How is the rating methodology of Moody's structured?
    Broad Rating factors with Rating Subfactors. Subfactors get a weight within the factor and are measured with certain indicators.
  • How can the subjective opinion of the people involved in the rating process influence the rating of Moody's?
    In each broad rating factor there are adjustment factors.
  • Are ratings a good source of information?
    Best information available, but not good information.
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