Part 4 VaR for Measuring Credit Risk

Spring 2012

Prof.Tarek Eldomiaty

VaR Methodology
Quantile VaR, or Percentile VaR. Historical Simulations Method. Monte Carol Simulations Method.

Spring 2012

Prof.Tarek Eldomiaty

Quantile, (or Percentile) VaR

VaR z z Constant One tail CI for standardized ND z NORMINVat 99%, or 95%, or 90% 0, 1

Standard Deviation

VaR stands for Value at Risk. It measures the portion of a variable that is at risk based on its variability (standard deviation) within a specified period of time.
Spring 2012 Prof.Tarek Eldomiaty 3

Holding Period VaR

VaR z t z Constant One tail CI for standardized ND z NORM INVat 99%, or 95%, or 90% 0, 1

Standard Deviation
t Holding period horizon as a fraction of a year

Spring 2012

Prof.Tarek Eldomiaty

Value at Risk and Credit at Risk

In terms of corporate earnings power, the EBIT is the pool that the company uses to pay the fixed financial obligations.

The EBIT at risk is the maximum amount of EBIT the

company may lose at a certain confidence interval.

Therefore, what matters for the credit analyst is the Safe

EBIT = EBIT EBIT at risk

When the Safe EBIT > the amount of annual interest on loans, the company credit worthiness is good

Spring 2012

Prof.Tarek Eldomiaty

Spring 2012

Prof.Tarek Eldomiaty

Spring 2012

Prof.Tarek Eldomiaty

Spring 2012

Prof.Tarek Eldomiaty

Spring 2012

Prof.Tarek Eldomiaty

Spring 2012

Prof.Tarek Eldomiaty

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Spring 2012

Prof.Tarek Eldomiaty

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