Hi all,

I'm working my way through the Credit Risk Handbook for exam 3 and am in Chapter 5 (modern Credit Risk Modelling) on the "Discussing the Gordy-Jones Results" section (page 185-186).

Half way down page 186 it suggests that there could be an exam question along the lines of:

"How does the ratio of total capital vs granular capital behave when the PD increases (increases, same, decreases)?"

I've manage to derive the K=... formula (noting the mistake on page 184 with L = EAD x LGD iff X < ...) and so have a rough understanding of the concept although any help on the above question would be greatly appreciated!

Thanks,

Ryan