| Consider the following statements related to Comparative Rating Index for Sovereigns (CRIS). |
| 1. If nation's index sovereign credit rating is constant and all other nation's Moody's ratings rise, then the nation's index of CRIS will decline. |
| 2. The weighted average of the CRIS for all nations is constant. |
| 3. The CRIS has been constructed, so as to register diminishing marginal returns to improvements in the absolute ratings. |
| Which of the statements] given above is/are correct? |
A) 2 and 3
B) 1 and 2
C) Only 3
D) All of these
Correct Answer: D
Solution :
[d] The standard sovereign credit rating is a statement of how safe and rewarding a nation's credit is, without any account of where other nation's stand on this dimension. However, for investors it is often critical to know how a nation does in comparative terms. Accordingly, a new index has been developed that is called the 'Comparative Rating Index for Sovereigns' (CRIS). The precise mathematical formula for the CRIS, and hence the paper is confidential. But its broad idea is easy to explain. It should first be clarified that its computation is based on nothing apart from standard ratings data and data on the GDPs of different nations in order to determine the importance or weights of different nations. For a variety of reasons, the researchers settled on Moody's foreign currency credit ratings and the International Monetary Fund's (IMF) GDP statistics, with no Purchasing Power Parity (PPP). Each nation's CRIS is constructed using these two sets of numbers. Among the important mathematical properties of the CRIS are the following If nation i's sovereign credit rating is constant, and all other nations' Moody's rating rise, then nation i's CRIS will decline. The weighted average of the CRIS for all nations is constant. Hence, one nation's improvement in CRIS is invariably accompanied by worsening of the CRIS for some other nation or nations. The CRIS has been constructed so as the register diminishing marginal returns to improvements in the absolute ratings. This is motivated from the observation that once a high rating has been achieved by a country it is easier to retain that rating than it is for a lower rated country to rise in the ratings scale.
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