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Credit Risk Management Primer

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av vedpuriswar
av vedpuriswar

Overview of Credit Risk Management for MBA students

Wirtschaft & FinanzenTechnologie
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Credit Risk Management Primer September 16, 2009 By A. V. Vedpuriswar
Introduction to Credit Risk ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
Understanding Credit Risk ,[object Object],[object Object],[object Object],[object Object],[object Object]
Banking and trading books ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
The Building blocks of Credit Risk Management ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
Probability of Default ,[object Object],[object Object],[object Object],[object Object]
Estimating Probability of Default ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
Credit Rating ,[object Object],[object Object],[object Object],[object Object]
Default events ,[object Object],[object Object],[object Object]
Transition Matrices ,[object Object],[object Object],[object Object],[object Object]
Exposure at Default ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
Loss Given Default ,[object Object],[object Object],[object Object],[object Object]
Factors affecting LGD ,[object Object],[object Object],[object Object]
Average cumulative default rates (%), 1970-2003 ( Source: Moody’s) Rating Term (Years) 1 2 3 4 5 7 10 15 20 Aaa 0.00 0.00 0.00 0.04 0.12 0.29 0.62 1.21 1.55 Aa 0.02 0.03 0.06 0.15 0.24 0.43 0.68 1.51 2.70 A 0.02 0.09 0.23 0.38 0.54 0.91 1.59 2.94 5.24 Baa 0.20 0.57 1.03 1.62 2.16 3.24 5.10 9.12 12.59 Ba 1.26 3.48 6.00 8.59 11.17 15.44 21.01 30.88 38.56 B 6.21 13.76 20.65 26.66 31.99 40.79 50.02 59.21 60.73 Caa 23.65 37.20 48.02 55.56 60.83 69.36 77.91 80.23 80.23
Recovery rates on corporate bonds as a percent of face value, 1982-2004. ( Source : Moody’s). Class Average recovery rate (%) Senior secured 57.4 Senior unsecured 44.9 Senior subordinated 39.1 Subordinated 32.0 Junior subordinated 28.9
Problem ,[object Object]
[object Object],[object Object],[object Object],[object Object]
Problem ,[object Object]
[object Object],[object Object],[object Object],[object Object]
Problem ,[object Object]
Solution ,[object Object],[object Object],[object Object],[object Object]
Problem ,[object Object]
[object Object],[object Object],[object Object],[object Object]
Calculating probability of default from bond yields ,[object Object],[object Object]
Problem ,[object Object]
Solution ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
Problem ,[object Object]
Solution ,[object Object],[object Object],[object Object]
Problem ,[object Object]
Solution ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
Significance of Credit spread ,[object Object],[object Object]
Problem ,[object Object]
Solution ,[object Object],[object Object],[object Object],[object Object],[object Object]
Problem ,[object Object]
Solution ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
Problem ,[object Object],[object Object],[object Object],[object Object]
Solution ,[object Object],[object Object],Risk free bond Corporate bond Year Cash flow PV factor e -(.03)t PV PV factor e -(.05)t PV .5 2 .9851 1.9702 .9754 1.9508 1.0 2 .9704 1.9408 .9512 1.9024 1.5 2 .9560 1.9120 .9277 1.8554 2.0 2 .9418 1.8836 .9048 1.8096 2.5 2 .9277 1.8554 .8825 1.7650 3.0 2 .9139 1.8278 .8607 1.7214 3.5 2 .9003 1.8006 .8395 1.679 4.0 102 .8869 90.4638 .8187 83.51 103.6542 96.21
[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
Solution (Cont…) ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
Solution (Cont…) ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
Solution (Cont…) ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
Solution (Cont…) ,[object Object],[object Object],[object Object],Default point (Years) Expected losses PV 1 (104.78 – 30)Q = 74.78Q (74.78)Qe -.03 = 72.57Q 2 (103.88 – 30)Q = 73.78Q (73.88)Qe -.06 = 69.58Q 3 (102.95 – 30)Q = 72.95Q (72.95)Qe -.09 = 66.67Q 4 (102 – 30)Q = 72 Q (72)Qe -.12 = 63.86Q 272.68 Q
Problem ,[object Object]
Solution ,[object Object],[object Object],[object Object]
Problem ,[object Object],[object Object],[object Object],[object Object],[object Object]
Solution ,[object Object],[object Object],[object Object],[object Object]
Problem ,[object Object],[object Object],[object Object]
Solution ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
Solution ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
Problem ,[object Object]
Solution ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],Problem
[object Object],[object Object],[object Object],[object Object],[object Object],Solution
[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],Problem
[object Object],[object Object],[object Object],Solution

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Credit Risk Management Primer

  • 1. Credit Risk Management Primer September 16, 2009 By A. V. Vedpuriswar
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  • 14. Average cumulative default rates (%), 1970-2003 ( Source: Moody’s) Rating Term (Years) 1 2 3 4 5 7 10 15 20 Aaa 0.00 0.00 0.00 0.04 0.12 0.29 0.62 1.21 1.55 Aa 0.02 0.03 0.06 0.15 0.24 0.43 0.68 1.51 2.70 A 0.02 0.09 0.23 0.38 0.54 0.91 1.59 2.94 5.24 Baa 0.20 0.57 1.03 1.62 2.16 3.24 5.10 9.12 12.59 Ba 1.26 3.48 6.00 8.59 11.17 15.44 21.01 30.88 38.56 B 6.21 13.76 20.65 26.66 31.99 40.79 50.02 59.21 60.73 Caa 23.65 37.20 48.02 55.56 60.83 69.36 77.91 80.23 80.23
  • 15. Recovery rates on corporate bonds as a percent of face value, 1982-2004. ( Source : Moody’s). Class Average recovery rate (%) Senior secured 57.4 Senior unsecured 44.9 Senior subordinated 39.1 Subordinated 32.0 Junior subordinated 28.9
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