Credit VaR

reference number
Version
publication date
author
affiliation
email address
last revised date
references

copyright THC 2003. All rights reserved by Thomas Ho Company

91
classification #
150701
Instructions
1.0
level
intermediate Determine the VaR due to credit risk by:
May-03
1. Using the transition matrix to determine the proba
Hanyang Financial Engineering Lab.
2. Relate the change of rating to the potential loss vi
Hanyang University
inputs
transition matrix, one year forward ze
leesb@hanyang.ac.kr
and description of risky bonds such a
Nov-03
outputs
credit VaR
Ch. 15 of the "The Oxford Guide to Financial Modeling" by Thomas S.Y. Ho and Sang Bin Lee, 20

Descriptions
financial model class
issuer
model type
risk sources
risk distribution
economic assumptions
technical assumptions
key words
Links
data
financial models

A credit risk measure for bonds

Risk Management
N/A
credit risk measure
credit risk
empirically determined
perfect capital market
credit risk measure

http://finance.yahoo.com/

http://www.riskmetrics.com/

Inputs
Transition Matix
Initial Rating
AAA
AA
A
BBB
BB
B
CCC

AAA
90.81
0.70
0.09
0.02
0.03
0.00
0.22

One Year Forward zero curves

Category
1
AAA
3.60
AA
3.65
A
3.72
BBB
4.10
BB
5.55
B
6.05
CCC
15.05
Bond Data Set
Bond Number
1
2
3

AA
8.33
90.65
2.27
0.33
0.14
0.11
0.00

A
0.68
7.79
91.05
5.95
0.67
0.24
0.22

3
4.17
4.22
4.32
4.67
6.02
7.02
15.02

Credit Grade Face Value

A
100
BBB
100
BB
100

Rating at year-end(%)
BBB
BB
0.06
0.12
0.64
0.06
5.52
0.74
86.93
5.30
7.73
80.53
0.43
6.48
1.30
2.38

4
4.73
4.78
4.93
5.25
6.78
8.03
14.03

Maturity
5
5
5

5.12
5.17
5.32
5.63
7.27
8.52
13.52

Coupon Rate Recovery Rate

zero
0.6
0.06
0.55
0.03
0.4

Bond Description
Face Value
Coupon Rate

100
3%

Bond Portfolio Credit VaR input descriptions

bond ratings
VaR Calculation Method

A, BBB, BB
Linear Interpolation

Outputs
10% significance level Bond Credit VaR Calculation
Bond Credit VaR =

5.01155

Interim Calculations
BB rating Bond Credit VaR Calculation
Bond Prices(the basis credit rating BB bond) one-year hence and corresponding profit/loss calculation
Grade
Price
Profit/Loss
Probability
Cumulative Probability

AAA
95.624
6.859
0.030
100.000

AA
95.456
6.691
0.140
99.970

A
94.959
6.194
0.670
99.830

BBB
93.928
5.163
7.730
99.160

BB
88.765
0.000
80.530
91.430

s reserved by Thomas Ho Company, New York, NY. USA

www. thomasho.com

aR due to credit risk by:

sition matrix to determine the probability distribution of the rating
nge of rating to the potential loss via the credit spreads.
ansition matrix, one year forward zero curves for various ratings
nd description of risky bonds such as rating or maturity

omas S.Y. Ho and Sang Bin Lee, 2003, Oxford University Press

r-end(%)

ecovery Rate

B
0.00
0.14
0.26
1.17
8.84
83.46
11.24

CCC
0.00
0.02
0.01
1.12
1.00
4.07
64.86

Default
0.00
0.00
0.06
0.18
1.06
5.20
19.79

tom.ho@thomasho.com

loss calculation
B
85.095
-3.670
8.840
10.900

CCC
71.921
-16.845
1.000
2.060

Default
40.000
-48.765
1.060
1.060