This model brings a micro economical point of view to credit risk modeling.

The logic behind

the model is that in its fundamental, all the money that makes it available to pay the
outstanding debt is driven from the total revenue figure. The model is pretty basic and
straightforward but I believe that it captures the risks arousing from the variations in income
statement items pretty well.

Another point that makes the model attractive is that it does not require a credit rating to put
into. Therefore, in emerging markets, even in developed markets where a credit rating does not
exist for the borrower, the model can be a guide in the assessment of credit risk. Furthermore,
since the model has an income statement point of view to credit risk modeling, it is flexible
enough to include any income statement item in the model by categorizing it in the appropriate
title, either fixed or variable cost.

It must be noted that increasing the number of simulations to be executed (Cell: B3) would
enhance the accuracy of the results.

METIN KILIC
 INPUT OUTPUT
# of Simulations 2,000 # of Simulations Executed

Historic Minimum Demand 8,000

Historic Maximum Demand 12,000 EXPECTED
Fixed Cost 6,000 PROFIT
Average Variable Cost 100
Stan. Deviation of Var. Cost 12
Average Price 150
Stan. Deviation of Price 10 DEFAULT
PROBABILITY
Debt Amount 375,000
 Profit Frequency
PROBABILITY (of
profit's being higher than...)
OUTPUT -128,457 1
2,000 Almost 100% -158,990 -97,924 0
95% 244,977 -67,391 1
90% 289,198 -36,858 0
85% 320,252 -6,325 0
492,285 80% 351,416 24,208 0
75% 376,988 54,741 0
70% 402,280 85,274 0
65% 425,024 115,807 10
60% 444,196 146,340 8
24.45% 55% 464,959 176,873 17

Median, 50% 486,869 207,406 26

45% 506,761 237,939 32

40% 526,803 268,472 47
35% 547,549 299,005 86
30% 574,176 329,537 104
25% 600,236 360,070 103
20% 630,083 390,603 121
15% 663,874 421,136 122
10% 704,491 451,669 155
5% 771,589 482,202 147
Almost 0% 1,062,328 512,735 148
543,268 145
573,801 126
604,334 117
634,867 97
665,400 93
695,933 82
726,466 42
756,999 52
787,532 34
818,065 25
848,598 22
879,131 19
909,664 3
940,197 6
970,729 6
1,001,262 2
1,031,795 0
1,062,328 1
 9720
123.852476851136
93.1891387016085
911798.428179634
1203846.07499304
292047.646813407
 (# of outcomes out of # of simulati
Frequency

FREQUENCY DISTRIBUTION
180

160

140

120

100

80

60

40

20

Profit
STRIBUTION

rofit