Abstract
The credit risk model has three parts. Part one is the basis relevant to the credit officer for approving or disapproving loans with minimum capital requirements. If there is not enough cash to meet this requirement in any year, a “solvency” loan is available from the lender. This is an unlimited line of credit. Although it might be fiction, it is introduced as a measure of the risk of the original loan. Part two details that business cycles of random lengths are built into the model. Prices and sales volumes are assumed to be larger in “up” cycles and smaller in “down” cycles. Fixed costs and interest rates are also assumed to be larger in “up” cycles. The model with correlated price and volume incorporated parts one and two. It also added part three, in which the price and sales volume are now correlated in any given year.
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