A Bank Manager Is Interested in Assigning a Rating to the Holders

question 8

Essay

A bank manager is interested in assigning a rating to the holders of credit cards issued by her bank.The rating is based on the probability of defaulting on credit cards and is as follows. To estimate this probability,she decided to use the logistic model where
y = a binary response variable with value of 1 corresponding to a default,and 0 to a no default
x₁ = the ratio of the credit card balance to the credit card limit (in %)
x₂ = the ratio of the total debt to the annual income (in %)
Using Minitab on the sample data,she arrived at the following estimates: Note: The p-values of the corresponding tests are shown in parentheses below the estimated coefficients.
If only applicants with excellent and good ratings are qualified for a loan,find a linear relation between their balance ratio and their debt ratio that must be satisfied to be qualified.

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Definitions:

Inverse Floaters

A type of bond or other debt instrument whose coupon rate has an inverse relationship to short-term interest rates, thus fluctuating oppositely to market rates.

Short Hedge

A risk management strategy used to protect against the decline in the price of a commodity or asset, involving the sale of futures contracts or other derivatives.

Marked-To-Market

Occurs when the value of a security is valued at its current market value rather than its original price or its exercise value.

Credit Default Swap

A financial instrument that enables an investor to transfer or mitigate their credit risk by exchanging it with another investor.