1. © K. Cuthbertson and D. Nitzsche Figures for Chapter 25 CREDIT RISK (Financial Engineering : Derivatives and Risk Management)

2. © K. Cuthbertson and D. Nitzsche Figure 25.1 : Distribution of 5-year BBB bond 50 60708090100110 0.000 0.025 0.050 0.075 0.100 0.900 Default CCC B BB BBB A AA AAA Revaluation at Risk Horizon (+1 year) Frequency Source : J.P. Morgan (1997) CreditMetrics TM Technical Document Chart 1.2.

3. © K. Cuthbertson and D. Nitzsche Figure 25.2 : Calculation of C-VaR SeniorityCredit RatingCredit Spread Recovery Rate in Default Migration Likelihoods Value of Bond in new Rating Standard Deviation or Percentile Level for C-VaR

4. © K. Cuthbertson and D. Nitzsche Figure 25.3 : Marginal risk and credit exposure Credit Exposure ($m) 7.55 1015 Asset 18 (BBB) Asset 15 (B) Asset 9 Asset 16 Asset 7 (CC) 0 0.0% 2.5% 5.0% 7.5% 10% Marginal Standard Deviation (  p+i -  p )/  i Source : J.P. Morgan (1997) CreditMetrics TM Technical Document Chart 1.2.

5. © K. Cuthbertson and D. Nitzsche Figure 25.4 : Transition probabilities : initial BB-rated Probability Transition prob.: CCC B BB BBB A AA AAA -2.30 1.06 -2.04 1.00 -1.23 8.84 80.53 1.37 7.73 2.39 0.67 2.93 0.14 3.43 0.03 Std. dev: We assume (for simplicity) that the mean return for the stock of an initial BB-rated firm is zero Probability of a downgrade to B-rated Probability of default Z

6. © K. Cuthbertson and D. Nitzsche Figure 25.5 : Probability distribution of losses Loss in $’s Probability Unexpected Loss Expected Loss Economic Capital $30,000$80,000 0.224 0.049 0.008 99th percentile