Answer to Question #223585 in Management for Harsh

Question

Q1. Explain in detail Credit risk basics in context with probability of default, credit ratings and transition matrix analysis, Contingent claim approach and the Kmv model, also explain credit risk mangement and credit var .

Q2. Write a note on currency risk Analysis in context with currency risk analysis in global investing, Risk environment in Indian forex markets

Answer 1

1) Credit risk in context with probability of default is the likelihood that a borrower will not pay back a debt.

Credit ratings on the other hand is an opinion made by a credit agency of the ability and willingness of somebody to pay back debts within the established due dates. On another note, credit transition analysis shows the frequency in % of upgrades and downgrades from one credit category to another within a given period of time.

Contingent claim approach in management is a way of analyzing and managing private-sector risk and it represent any financial asset whose future pay off depends on the value of another asset.

KMV model is a model that uses an equity-value-based approach that estimate a firm's credit risk. Additionally, credit value at risk is the difference between expected and unexpected losses in one year with reference to a statistical level of confidence.

2) Currency risk is a risk that comes from changes in price of one currency against another. So, if Indian forex markets fluctuates, price of currency will also fluctuate.