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Spring 2012 ©Prof.Tarek Eldomiaty 1
Part 4
VaR for Measuring Credit Risk
Spring 2012 ©Prof.Tarek Eldomiaty 2
VaR Methodology
Quantile VaR, or Percentile VaR.
Historical Simulations Method.
Monte Carol Simulations Method.
Spring 2012 ©Prof.Tarek Eldomiaty 3
Quantile, (or Percentile) VaR
• 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.
Deviation Standard
1 0, 90%or 95%,or 99%,at NORMINV
ND edstandardizfor CI tailOneConstant
VaR
z
z
z
Spring 2012 ©Prof.Tarek Eldomiaty 4
year a offraction a ashorizon period Holding
Deviation Standard
1 0, 90%or 95%,or 99%,at NORMINV
ND edstandardizfor CI tailOneConstant
VaR
t
z
z
tz
Holding Period VaR
Spring 2012 ©Prof.Tarek Eldomiaty 5
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 6
Spring 2012 ©Prof.Tarek Eldomiaty 7
Spring 2012 ©Prof.Tarek Eldomiaty 8
Spring 2012 ©Prof.Tarek Eldomiaty 9
Spring 2012 ©Prof.Tarek Eldomiaty 10
Spring 2012 ©Prof.Tarek Eldomiaty 11
