.chapter24<-function(i=0){ " i Chapter 24: Credit risk analysis - ------------------------------------- 1 What is credit risk? 2 Credit spread 3 Credit rating 4 Term structure of interest rate 5 6 7 8 9 10 11 12 13 payoff of a call vs. D and E 14 VBA for Black-Sholes call option 15 16 17 18 19 Videos 20 Links Example #1:>.c24 # see the above list Example #2:>.c24() # the same as the above Example #3:>.c24(1) # see the first explanation ";.zchapter24(i)} .n24chapter<-20 .zchapter24<-function(i){ if(i==0){ print(.c24) }else{ .printEachQ(24,i,.n24chapter) } } .c24<-.chapter24 .C24EXPLAIN1<-"From where to download R //////////////////////////////// A credit risk is the risk of default on a debt that may arise from a borrower failing to make required payments. In the first resort, the risk is that of the lender and includes lost principal and interest, disruption to cash flows, and increased collection costs. https://en.wikipedia.org/wiki/Credit_risk /////////////////////////////// " .C24EXPLAIN2<-"Credit spread //////////////////////////////// A credit spread is the difference in yield between two bonds of similar maturity but different credit quality. For example, if the 10-year Treasury note is trading at a yield of 6% and a 10-year corporate bond is trading at a yield of 8%, the corporate bond is said to offer a 200-basis-point spread over the Treasury. /////////////////////////////// " .C24EXPLAIN3<-"Credit rating //////////////////////////////// /////////////////////////////// " .C24EXPLAIN4<-"Term structure of interest rate //////////////////////////////// The relationship between time and risk-free rate. https://finance.yahoo.com/bonds For example, on 4/26/2017 US Treasury Bonds Rates Maturity Yield Yesterday Last Week Last Month 3 Month 0.76 0.75 0.75 0.71 6 Month 0.92 0.92 0.81 0.75 2 Year 1.24 1.25 1.15 1.24 3 Year 1.44 1.46 1.35 1.49 5 Year 1.81 1.84 1.72 1.90 10 Year 2.29 2.31 2.19 2.36 30 Year 2.95 2.97 2.85 2.96 /////////////////////////////// " .C24EXPLAIN5<-"add soon //////////////////////////////// /////////////////////////////// " .C24EXPLAIN6<-"add soon //////////////////////////////// /////////////////////////////// " .C24EXPLAIN7<-"add soon //////////////////////////////// /////////////////////////////// " .C24EXPLAIN8<-"add soon //////////////////////////////// /////////////////////////////// " .C24EXPLAIN9<-"add soon //////////////////////////////// /////////////////////////////// " .C24EXPLAIN10<-"add soon //////////////////////////////// /////////////////////////////// " .C24EXPLAIN11<-"add soon //////////////////////////////// /////////////////////////////// " .C24EXPLAIN12<-"add soon //////////////////////////////// /////////////////////////////// " .C24EXPLAIN13<-"payoff of a call vs. D and E //////////////////////////////// The payoff function for a call option buyer is given below. payoff(call) = Max( sT-X, 0) (1) where sT is the stock price at T T is the maturity X is the exercise price For example, we then sT=10, and x=15 The price of the cal is zero since nobody is willing to pay $15 to buy a share when its market value is $10. when sT=20, the payoff will be $5. Now, let's look at the relationship between D and E. ---------------------------------- Concept #1: Equity holder is a so-called residual benefit claimer. It means that only after debt (bond) holders get paid then the equity holders would get anything left. A= E + D Where A is assets E is equity D is debt Obviously, only when A > D, E>0 E = max(A-D,0) (2) This is the same as the payoff for a call option: payoff(call) = Max( sT- X, 0) (1) E = Max( A - D, 0) (2) /////////////////////////////// " .C24EXPLAIN14<-"VBA for Black-Scholes call option model //////////////////////////////// Function bsCall(S, X, T, r, sigma) As Single d1 = (Log(S / X) + (r + 0.5 * sigma ^ 2) * T) / (sigma * (Sqr(T))) d2 = d1 - sigma * Sqr(T) bsCall = S * Application.NormSDist(d1) - X * Exp(-r * T) * Application.NormSDist(d2) End Function /////////////////////////////// " .C24EXPLAIN15<-"add soon //////////////////////////////// /////////////////////////////// " .C24EXPLAIN16<-"add soon //////////////////////////////// /////////////////////////////// " .C24EXPLAIN17<-"add soon //////////////////////////////// /////////////////////////////// " .C24EXPLAIN18<-"add soon //////////////////////////////// /////////////////////////////// " .C24EXPLAIN19<-"videos //////////////////////////////// /////////////////////////////// " .C24EXPLAIN20<-"Links //////////////////////////////// Credit risk ----------- Wikipedia https://en.wikipedia.org/wiki/Credit_risk Investopeid http://www.investopedia.com/terms/c/creditrisk.asp SAS, Credit Risk Management: What it is and why it matters https://www.sas.com/en_us/insights/risk-management/credit-risk-management.html /////////////////////////////// "