(Answered) A bank computes the distribution of its loan portfolio

Finance

A bank computes the distribution of its loan portfolio marked-to-market value one year from now using the Credit Metrics approach of computing values for rating transition outcomes using (1) a rating agency transition matrix,(2) current forward curves, and (3) correlations among rating transition outcomes derived from stock returns of the obligors. In computing firm-wide risk using this distribution of its loan portfolio, the bank is most likely to understate its risk because it ignores

A. The term structure of interest rates

B. Rating drift

C. Spread risk

D. The negative correlation between the Treasury rates and credit spreads

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