What Are the Limitations of Relying Solely on Credit Ratings for Risk Management?
Relying solely on credit ratings has several limitations: they are backward-looking, slow to react to sudden market changes, and often exhibit procyclicality. They also represent a generalized default probability, not the specific exposure risk to a firm.
The 2008 crisis demonstrated that ratings can fail simultaneously, necessitating more dynamic, real-time risk measures like mark-to-market exposure.
Glossar
Limitations
Constraints ⎊ The inherent limitations within cryptocurrency, options trading, and financial derivatives stem from market microstructure, regulatory uncertainty, and technological dependencies, impacting model accuracy and execution feasibility.
Short-Term Credit
Credit ⎊ Short-term credit, within the context of cryptocurrency derivatives, options trading, and financial derivatives, represents a temporary funding mechanism facilitating margin requirements, covering potential losses, or capitalizing on fleeting market opportunities.
Credit
Exposure ⎊ Within cryptocurrency derivatives, credit fundamentally represents the potential loss arising from a counterparty’s failure to fulfill contractual obligations, particularly in scenarios involving margin calls or collateral deficiencies.