Divergence of credit valuation in Germany - Continuous theory and discrete practice

Lending is associated with credit risk. Modelling the loss stochastically,the cost of credit risk is the expected loss. In credit business the probabilitythat the debtor will default in payments within one year, often is the onlyreliable quantitative parameter. Modelling the time to default as continuousvariable corresponds to an exponential distribution. We calculate the ex-pected loss of a trade with several cash °ows, even if the distribution is notexponential. Continuous rating migration data show that the exponentialdistribution is not adequate in general.[...]