Quantification of Credit Risk with the Use of CreditMetrics

Abstract

Abstract The main aim of this paper is to present basic characteristics of CreditMetrics model and its model application. The importance of accurate credit risk quantification is growing nowadays in global economy just like in local economies. CreditMetrics approach is designed to measure the risk of credit loss caused by changes in the creditworthiness of borrowers. Loss does not occur only in the case of counterparty's default, but also upon its transition into worse rating category. The output of this model, however, is the entire distribution function of portfolio value. We will present application of this method for single bond. For this purpose we will use analytical method. We will use methods of formal logic such as: analysis, synthesis, deduction and comparison. The result will be comprehensive overview of CreditMetrics results under the conditions of local economy. We will also mention test results of various renowned agencies, which reflect the accuracy of this model.