Bachelor's thesis (Turku University of Applied Sciences) Degree Program in Business Management

party issuance. In other words, a credit rating is an objective measurement 
system that indicates the trustworthiness of the issuer for any given type of 
security (Casu, Girardone and Molyneux, 2006, p 12).
Awarded by s
uch international credit agencies, like Moody’s and S&P, credit 
ratings are often expressed as a combination of letters (AAA, BBB, ... , Aaa, 
Bbb, C-, etc.). Depending on the classification, such combinations indicate the 
safety rating of a certain security, with letter A being the highest one (Casu, 
Girardone and Molyneux, 2006, p 12).
Credit rating classifications involved in current research are based on the 
following system (Casu, Girardone and Molyneux, 2006, p. 93): 
Table 3 Credit rating classifications involved in current research (Casu, Girardone and 
Molyneux, 2006, p. 93) 
3.3 Value at Risk (VaR) 
In the course of current Thesis, readers will discover that one of the most 
commonly used method in evaluation of market and any interest-rate fluctuation 
related risks often revolves around the VaR and stressed VaR economic 
models.

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TURKU UNIVERSITY OF APPLIED SCIENCES THESIS | Artem Vorobyev 
Whereas the empirical value of the VaR model as such is going to be identified 
further in the research, it might be substantially more convenient to describe 
some theoretical details in this section. 
When reviewing the practical application of the VaR model, Casu, Girardone 
and Molyneux typically agree on i
ts definition as being “a technique that uses 
statistical analysis of historical market trends and volatilities to estimate the 
likely or expected maximum loss on a bank’s portfolio or line of business over a 
set time period, with a given probability. The aim is to get one figure that 
summarises the maximum loss faced by the bank within a statistical confidence 
interval” (Casu, Girardone and Molyneux, 2006, p. 497). 
In order to clarify this sophisticated disposition, let us try to break the definition 
into several parts and, thus, explore each of them individually.
After analysing the first part of the definition it is possible to assume that, while 
being an effective way of hedging against the market risk, VaR model allows 
predicting the level of exposure to certain changes in the market variables.
The subsequent part tells us that the key objective of the model is to summarize 
the value of risk as a simple figure that would be easily interpretable as a 
quantitative indication of the level of risk. 
Being a logical follow-up to MPT in the respect that it deals with a compound 
investment portfolio and, therefore, analyses risk exposure of certain financial 
assets, VaR model could be expressed as certain formula, the exact 
mathematical representation of which is not that important for us. 
However, it could still be essential to mention that in its core the formula is 
targeted at examining the relations between market value of investment 
portfolio, its susceptibility to changes in price fluctuations (per certain amount) 
over a specified period of time (Casu, Girardone and Molyneux, 2011, p. 299). 
In other words, the final VaR figure serves as the indication of the utmost or 
largest sum of money that could be lost as a follow up to fluctuations in various 

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TURKU UNIVERSITY OF APPLIED SCIENCES THESIS | Artem Vorobyev 
market variables at a stated time period with an indicated percent of probability 
(also known as confidence level).
Using the concept of time and the confidence variable, investors could 
potentially try to resolve the question: “What amount of money am I likely to lose 
during a certain time period 
and corresponding level of probability?” (Casu, 
Girardone and Molyneux, 2011, p. 300). 
As a further reference, it is important to examine the following problem: counted 
on a weekly 
basis VaR model that is equal to € 100 000 and has a confidence 
level of 95% means that there is only a 5% probability chance 
that a sum of € 
100 000 would be lost in the course of 7 days of financial operations (taking into 
consideration only the market risk).