Credit risk management

1. Example Index
Copyright 2018 CapitaLogic Limited
Example Description Excel technique
1 Historical volatility of Ford Motor
2 Black-Scholes formula
3 Merton's corporate default model Goal Seek
4 Balance sheet of Ford Motor Web query
5 Income statement of Ford Motor Web query
6 Financial ratios of Ford Motor
7 Listed manufacturing companies
8 Altman's Z-score
9 Altman's Z'-score
10 Altman's Z"-score
11 Consolidated assessment
12 EDGAR 10-K form
This Excel workbook is prepared in accordance with
Chapter 8 of the text book
"Managing Credit Risk Under The Basel III Framework, 3rd
ed"
Authored by : Dr. LAM Yat-fai (林日辉)
Principal, Structured Products Analytics, CapitaLogic Limited
Adjunct Professor of Finance, City University of Hong Kong
Doctor of Business Administration
CFA, CAIA, CAMS, FRM, PRM
Website: https://sites.google.com/site/crmbase
E-mail: crmbasel@gmail.com
Copyright 2018 CapitaLogic Limited

2. Example 1 Historical volatility
Date Price Return Date Price Return Date
30 Dec 2016 12.13 -0.82% 31 Dec 2015 14.09 -0.57% 31 Dec 2014
29 Dec 2016 12.23 -0.16% 30 Dec 2015 14.17 -0.42% 30 Dec 2014
28 Dec 2016 12.25 -1.14% 29 Dec 2015 14.23 0.35% 29 Dec 2014
27 Dec 2016 12.39 -0.56% 28 Dec 2015 14.18 -0.91% 26 Dec 2014
23 Dec 2016 12.46 0.48% 24 Dec 2015 14.31 -0.35% 24 Dec 2014
22 Dec 2016 12.40 -1.92% 23 Dec 2015 14.36 1.12% 23 Dec 2014
21 Dec 2016 12.64 -1.10% 22 Dec 2015 14.20 3.37% 22 Dec 2014
20 Dec 2016 12.78 0.94% 21 Dec 2015 13.73 -0.51% 19 Dec 2014
19 Dec 2016 12.66 0.24% 18 Dec 2015 13.80 -1.30% 18 Dec 2014
16 Dec 2016 12.63 0.40% 17 Dec 2015 13.98 -2.68% 17 Dec 2014
15 Dec 2016 12.58 0.40% 16 Dec 2015 14.36 3.47% 16 Dec 2014
14 Dec 2016 12.53 -1.90% 15 Dec 2015 13.87 1.82% 15 Dec 2014
13 Dec 2016 12.77 -0.39% 14 Dec 2015 13.62 -0.15% 12 Dec 2014
12 Dec 2016 12.82 -2.69% 11 Dec 2015 13.64 -2.32% 11 Dec 2014
09 Dec 2016 13.17 1.07% 10 Dec 2015 13.96 0.50% 10 Dec 2014
08 Dec 2016 13.03 -0.23% 09 Dec 2015 13.89 -0.57% 09 Dec 2014
07 Dec 2016 13.06 3.90% 08 Dec 2015 13.97 -1.07% 08 Dec 2014
06 Dec 2016 12.56 0.96% 07 Dec 2015 14.12 -0.56% 05 Dec 2014
05 Dec 2016 12.44 1.62% 04 Dec 2015 14.20 1.56% 04 Dec 2014
02 Dec 2016 12.24 -1.54% 03 Dec 2015 13.98 -1.98% 03 Dec 2014
01 Dec 2016 12.43 3.85% 02 Dec 2015 14.26 -2.08% 02 Dec 2014
30 Nov 2016 11.96 0.34% 01 Dec 2015 14.56 1.59% 01 Dec 2014
29 Nov 2016 11.92 0.00% 30 Nov 2015 14.33 -1.39% 28 Nov 2014
28 Nov 2016 11.92 -1.00% 27 Nov 2015 14.53 -0.14% 26 Nov 2014
25 Nov 2016 12.04 1.17% 25 Nov 2015 14.55 0.00% 25 Nov 2014
23 Nov 2016 11.90 0.08% 24 Nov 2015 14.55 0.00% 24 Nov 2014
22 Nov 2016 11.89 0.84% 23 Nov 2015 14.55 -0.34% 21 Nov 2014
21 Nov 2016 11.79 0.25% 20 Nov 2015 14.60 0.21% 20 Nov 2014
18 Nov 2016 11.76 -0.93% 19 Nov 2015 14.57 0.76% 19 Nov 2014
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3. Example 2 Black-Scholes formula
Equity price S0 12.13
Volatility σ 26.34%
Risk-free rate r 1.6716%
Strike price K 12.8
Time to maturity T 1
d1 -0.0089
d2 -0.2723
Φ(d1) 0.4964
Φ(d2) 0.3927
Call value c 1.0790
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4. Example 3 Merton's default model
Date 30 Dec 2016 31 Dec 2015 31 Dec 2014
Market value of equity E0 48,201 55,918 59,116
Equity volatility σE 26.34% 21.96% 21.08%
Market value of assets A0 253,392 249,819 241,801
Total liabilities L 208,685 196,189 183,835
Asset volatility σA 8.32% 7.97% 8.25%
Risk-free rate r 1.6716% 1.1711% 0.6268%
Time to maturity T 1 1 1
d1 2.574286543 3.217224708 3.438936721
d2 2.491042643 3.137482113 3.356426414
Φ(d1) 0.994977648 0.999352814 0.999707998
Φ(d2) 0.993631558 0.999147972 0.999605216
exp(-rT) 0.983422738 0.988357153 0.993751292
Calc value of equity E0 48,201 55,918 59,116
Market value of assets A0 253,392 249,819 241,801
Book value of total liabilities L 208,685 196,189 183,835
Asset volatility σA 8.32% 7.97% 8.25%
Time to maturity T 1 1 1
d1 2.574286543 3.217224708 3.438936721
d2 2.491042643 3.137482113 3.356426414
Φ(d2) 0.993631558 0.999147972 0.999605216
PD 1-Φ(d2) 0.6368% 0.0852% 0.0395%
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5. Example 4 Balance sheet
Ford Motor 30 Dec 2016 31 Dec 2015 31 Dec 2014
Assets
Current Assets
Cash And Cash Equivalents 15,905 14,272 10,757
Short Term Investments 22,922 20,904 20,393
Net Receivables 57,368 56,179 92,819
Inventory 8,898 8,319 7,870
Other Current Assets 3,368 2,913 2,913
Total Current Assets 108,461 102,587 131,839
Long Term Investments 53,228 48,778 3,357
Property Plant and Equipment 60,901 57,256 53,343
Goodwill
Intangible Assets
Accumulated Amortization
Other Assets 5,656 4,795 6,052
Deferred Long Term Asset Charges 9,705 11,509 14,024
Total Assets 237,951 224,925 208,615
Liabilities
Current Liabilities
Accounts Payable 21,296 20,272 20,035
Short/Current Long Term Debt 49,669 42,975 42,975
Other Current Liabilities 19,316 19,089 19,089
Total Current Liabilities 90,281 82,336 20,035
Long Term Debt 93,301 89,879 119,171
Other Liabilities 24,395 23,457 44,032
Deferred Long Term Liability Charges 691 502 570
Minority Interest 17 15 27
Negative Goodwill
Total Liabilities 208,685 196,189 183,835
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6. Example 5 Income statement
Ford Motor 30 Dec 2016 31 Dec 2015 31 Dec 2014
Total Revenue 151,800 149,558 144,077
Cost of Revenue 135,488 131,409 131,903
Gross Profit 16,312 18,149 12,174
Operating Expenses
Research Development
Selling General and Administrative 12,196 10,502 11,842
Non Recurring
Others
Total Operating Expenses
Operating Income or Loss 4,116 7,647 332
Income from Continuing Operations
Total Other Income/Expenses Net 1,794 1,560 424
Earnings Before Interest And Taxes 7,690 11,025 2,031
Interest Expense 894 773 797
Income Before Tax 6,796 10,252 1,234
Income Tax Expense 2,189 2,881 4
Minority Interest 17 15 27
Net Income From Continuing Ops 6,376 9,191 2,506
Non-recurring Events
Discontinued Operations
Extraordinary Items
Effect Of Accounting Changes
Other Items
Net Income 4,596 7,373 1,231
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7. Example 6 Financial ratio
30 Dec 2016 31 Dec 2015 31 Dec 2014 30 Dec 2016 31 Dec 2015 31 Dec 2014
Current assets 108,461 102,587 131,839 Current ratio 1.201371 1.245956 6.580434
Current liabilities 90,281 82,336 20,035
Cash 15,905 14,272 10,757 Quick ratio 1.065507 1.109539 6.187622
Marketable securities 22,922 20,904 20,393
Accounts receivable 57,368 56,179 92,819
Current liabilities 90,281 82,336 20,035
Cash 15,905 14,272 10,757 Cash ratio 0.430068 0.427225 1.554779
Marketable securities 22,922 20,904 20,393
Current liabilities 90,281 82,336 20,035
Total liabilities 208,685 196,189 183,835 L to E ratio 7.154096675 6.84969625 7.522505933
Total equity 29,170 28,642 24,438
Total liabilities 208,685 196,189 183,835 L to A ratio 0.877008292 0.872241858 0.881216595
Total assets 237,951 224,925 208,615
Total equity 29,170 28,642 24,438 E to A ratio 0.122588264 0.127340225 0.117144021
Total assets 237,951 224,925 208,615
EBIT 7,690 11,025 2,031 ROA 0.032317578 0.049016339 0.009735637
Total assets 237,951 224,925 208,615
EBIT 7,690 11,025 2,031 ROE 0.263627014 0.384924237 0.083108274
Total equity 29,170 28,642 24,438
EBIT 7,690 11,025 2,031 ROCE 187.5609756 268.902439 50.775
Total common equity 41 41 40
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8. Example 7 Listed manufacturing
GICS Sector GICS Sub Industry Security Ticker symbol Date first added
Consumer Discretionary Auto Parts & Equipment BorgWarner BWA 19 Dec 2011
Consumer Discretionary Auto Parts & Equipment Delphi Automotive PLC DLPH 24 Dec 2012
Consumer Discretionary Automobile Manufacturers Ford Motor F
Consumer Discretionary Automobile Manufacturers General Motors GM 06 Jun 2013
Consumer Discretionary Home Furnishings Leggett & Platt LEG
Consumer Discretionary Home Furnishings Mohawk Industries MHK 23 Dec 2013
Consumer Discretionary Household Appliances Snap-On Inc. SNA 30 Sep 1982
Consumer Discretionary Household Appliances Stanley Black & Decker SWK 30 Sep 1982
Consumer Discretionary Household Appliances Whirlpool Corp. WHR
Consumer Discretionary Housewares & Specialties Newell Brands NWL 30 Apr 1989
Consumer Discretionary Leisure Products Hasbro Inc. HAS 30 Sep 1984
Consumer Discretionary Leisure Products Mattel Inc. MAT 31 Mar 1982
Consumer Discretionary Motorcycle Manufacturers Harley-Davidson HOG
Consumer Discretionary Tires & Rubber Goodyear Tire & Rubber GT
Consumer Staples Agricultural Products Archer-Daniels-Midland Co ADM 29 Jul 1981
Consumer Staples Brewers Molson Coors Brewing Company TAP 30 Jun 1976
Consumer Staples Distillers & Vintners Brown-Forman Corp. BF.B 31 Oct 1982
Consumer Staples Distillers & Vintners Constellation Brands STZ 05 Jul 2005
Consumer Staples Household Products Church & Dwight CHD 29 Dec 2015
Consumer Staples Household Products Colgate-Palmolive CL
Consumer Staples Household Products Kimberly-Clark KMB
Consumer Staples Household Products The Clorox Company CLX 31 Mar 1969
Consumer Staples Packaged Foods & Meats Campbell Soup CPB
Consumer Staples Packaged Foods & Meats Conagra Brands CAG 31 Aug 1983
Consumer Staples Packaged Foods & Meats General Mills GIS 31 Mar 1969
Consumer Staples Packaged Foods & Meats Hormel Foods Corp. HRL 04 Mar 2009
Consumer Staples Packaged Foods & Meats JM Smucker SJM 06 Nov 2008
Consumer Staples Packaged Foods & Meats Kellogg Co. K
Consumer Staples Packaged Foods & Meats Kraft Heinz Co KHC 06 Jul 2015
Consumer Staples Packaged Foods & Meats McCormick & Co. MKC
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9. Example 8 Altman's Z-score
30 Dec 2016 31 Dec 2015 31 Dec 2014 30 Dec 2016 31 Dec 2015 31 Dec 2014
Market value of equity 48,201 55,918 59,116 X1 0.230976 0.285021 0.321570 α1 0.6
Total liabilities 208,685 196,189 183,835
Current assets 108,461 102,587 131,839 X2 0.076402 0.090034 0.535935 α2 1.2
Current liabilities 90,281 82,336 20,035
Total assets 237,951 224,925 208,615
Retain earnings 15,634 14,414 9,422 X3 0.065703 0.064084 0.045165 α3 1.4
Total assets 237,951 224,925 208,615
EBIT 7,690 11,025 2,031 X4 0.032318 0.049016 0.009736 α4 3.3
Total assets 237,951 224,925 208,615
Total revenue 151,800 149,558 144,077 X5 0.637946 0.664924 0.690636 α5 0.999
Total assets 237,951 224,925 208,615
Z-score 1.066208 1.194784 1.621367
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10. Example 9 Altman's Z'-score
Ford 30 Dec 2016 31 Dec 2015 31 Dec 2014 30 Dec 2016 31 Dec 2015 31 Dec 2014
Book value of equity 29,170 28,642 24,438 X1 0.139780 0.145992 0.132934 α1 0.42
Total liabilities 208,685 196,189 183,835
Current assets 108,461 102,587 131,839 X2 0.076402 0.090034 0.535935 α2 0.717
Current liabilities 90,281 82,336 20,035
Total assets 237,951 224,925 208,615
Retain earnings 15,634 14,414 9,422 X3 0.087660 0.080820 0.052829 α3 0.847
Total assets 178,348 178,348 178,348
EBIT 7,690 11,025 2,031 X4 0.043118 0.061817 0.011388 α4 3.107
Total assets 178,348 178,348 178,348
Total revenue 151,800 149,558 144,077 X5 0.851145 0.838574 0.807842 α5 0.998
Total assets 178,348 178,348 178,348
Z'-score 1.171146 1.223289 1.326452
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11. Example 10 Altman's Z"-score
Microsoft 30 Dec 2016 31 Dec 2015 31 Dec 2014 30 Dec 2016 31 Dec 2015 31 Dec 2014
Book value of equity 71,997 80,083 89,784 X1 0.591609 0.848436 1.086973 α1 1.05
Total liabilities 121,697 94,389 82,600
Current assets 139,660 122,797 114,246 X2 0.414587 0.419265 0.398071 α2 6.56
Current liabilities 59,357 49,647 45,625
Total assets 193,694 174,472 172,384
Retain earnings 2,282 9,096 17,710 X3 0.011781 0.052134 0.102736 α3 3.26
Total assets 193,694 174,472 172,384
EBIT 19,751 18,507 27,820 X4 0.101970 0.106074 0.161384 α4 6.72
Total assets 193,694 174,472 172,384
Z"-score 4.064526 4.524014 5.172083
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12. Example 11 Consolidated assessment
30 Dec 2016 31 Dec 2015 31 Dec 2014
Credit rating BBB BBB BBB
Merton's model 0.6368% 0.0852% 0.0395%
Altman's Z-score 1.0662 1.1948 1.6214
Credit rating Good Same Good Same Good
Merton's model Good Deteriorating Good Deteriorating Good
Altman's Z-score Bad Deteriorating Bad Deteriorating Bad
Overall
Credit quality Good Moderate Good
Relative position Lower end of Good
Credit rating BBB BB BBB
Relative position Lower end of BBB
PD 0.3345% 2.5652% 0.3345%
In between
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13. Example 12 EDGAR 10-K form
CONSOLIDATED BALANCE SHEET (Parenthetical) - USD ($) shares in Millions, $ in MillionsDec. 31, 2016 Dec. 31, 2015
ASSETS
Allowance for trade and other receivables 392 372
Common Stock [Member]
EQUITY
Common stock, par value (in dollars per share) 0.01
Common Stock, shares issued (in shares) 3976
Common Stock, Shares Authorized (in shares) 6000
Class B Stock [Member]
EQUITY
Common stock, par value (in dollars per share) 0.01
Common Stock, shares issued (in shares) 71
Common Stock, Shares Authorized (in shares) 530
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