Credit Risk Measurement Using VaR Methodology

Abstract

The risk reflects the uncertainty associated with expected returns. Credit risk causes that the issuer of an obligation may not be able to repay its debt and interests. It expresses credibility, reliability, and ability of securities issuers to get their liabilities. A measurement of credit risk is most often the assessment of specialized agencies that give a specific rating to every company. Potential failures or changes in reliability (rating) of the debtor, of counterparties in transactions with derivatives, and bond issuers cause formation and growth of credit risk which uses value at risk as a basic risk measurement. The contribution defines the specific methodology of credit risk measuring—value at risk, its theoretical knowledge and variants, as well as methods of value at risk calculation. Value at risk is considered to be the most modern type of a risk measure. An example is depicted in the last part of the contribution to illustrate and explain the methodology of value at risk calculation in practice.