Abstract

Contingent claims analysis (CCA) is a risk-adjusted balance sheet concept. It derives a coherent measure of credit risk based on the impact of uncertain changes in future asset values relative to promised payments on the valuation of debt obligations. It translates this uncertainty into quantifiable risk indicators that measure risk exposures to reveal whether balance sheet risks are building or subsiding. Such quantitative risk indicators also incorporate forward-looking information. CCA represents a generalization of the option pricing theory pioneered by Black and Scholes (1973) and Merton (1973). It is forward looking by construction, providing a consistent framework based on current market conditions rather than on historical experience.

Author: Ms. Li L Ong