Calculation of Distance to Default

Evaluation of the probability of default of the company is one of the fundamental issues of credit risk analysis. The probability of default is an important inputs into many types of credit risk management processes at the single name and portfolio level, as well as in the pricing and hedging of credit risk. Credit risk is an unseparated part of financial risk. The credit risk of the company is often discussed also as the risk of the default of the company. Default of the company is usually associated with the bankruptcy of the company. We are interested in the credit event or default event which is defined as a failure to accomplish a predetermined liabilities or to meet requirements detailed in the agreement. Modelling of credit risk for the prediction of the default should be in attention of many individuals and companies. Various credit rating agencies such as Standard and Poor, Fitch and Moody's were made for this case. The article is dedicated to the calculation of distance to default as a variable introduced in the KMV model.