Quantification of credit risk models

Credit risk is an unseparated part of financial risk. The credit risk of the company is often discussed also as the risk of the company default, which is usually associated with the bankruptcy of the company. Credit risk or default risk involves inability or unwillingness of a customer or counterparty to meet commitments in relation to any financial transactions. The Credit Risk is generally made up of transaction risk or default risk and portfolio risk. Difficulties in credit risk modelling arise due to the fact that the company default occurs mainly unexpectedly. However, if the default occurs, it often causes the creditors major losses which size cannot be quantified in advance. The issue of modelling and quantification of credit risk is the subject of present contribution. The aim of contribution is to analyse and to compare the basic approaches of credit risk quantification. We have chosen two specific models: CreditRisk+ and CreditMetrics. The CreditRisk+ model analytically determines the portfolio credit losses distribution that is caused by defaults of counterparties. In the CreditMetrics model, the credit migration risk is additionally considered and the future portfolio value distribution is calculated using the Monte Carlo simulation.