**Author details**

**7. Conclusion**

126 Financial Management from an Emerging Market Perspective

Despite the fact that numerous models for credit risk quantification have been developed, they differ not only in the way of their construction but also in the amount of input data, in the difficulty of their calculation, and also in the complexity of their usage. In this chapter, we focused on the structural models of credit risk introducing basic concepts of risk-neutral world, as well as models and different options for credit risk quantification. Furthermore, we have tested selected structural models namely Merton model, KMV model, Black-Cox model, and Credit Grades model under the conditions of local emerging market—Slovakia. These calculations were provided on the company data of the ČEZ Group, which is the largest energy group operating in Central and Southeastern Europe. Besides the headquarters in Bohemia, it has its representation in most of the countries in the region, including Slovakia. The main goal of the chapter was to adjust credit risk model to real market data. Calculation of default curves of ČEZ, a.s. has shown similar pattern in all models. However, the predicted probability values differ considerably. On the other side, the Credit Grades model generated interesting types of curves. Within a short horizon of up to 1 year, the company is virtually safe for all applied models, but in the long run, the forecasts vary considerably from 5 to 33%. This is given by the different design and also by the ability of models to sensitively react to

Similarly, to default curves also credit spreads generated by each model have similar patterns in all cases. Over a longer period at higher probability of defaults, the pattern tends to show negative spreads. Therefore, it is advisable to apply this model to predictions with a shorter time period. Another weakness in all models is low value of spreads in short time horizons

Since one of the most criticized assumptions of Merton model, is the assumption of a normal distribution of distance from defaults, we have decided to leave this assumption and to find a suitable functional relationship between the distance to default and its probability. Based on the collected data, we have calculated distance to default and found out interesting findings. In practice, credit ratings established by renowned agencies are the most commonly used, because they offer sufficient reporting ability in terms of the financial stability of the analyzed companies. Moody's official assigns ČEZ, a.s. rating at Baa1 level. The one-year probability of default level is 1.18%. This value is in the group also assigned by RMA study to this rating. Therefore, we can summarize that our approach to probability of default is relatively close to that one of Moody's agency, also more we would need more data to verify this even further,

The contribution is an output of the scientific project VEGA 1/0428/17: Creation of New Paradigms of Financial Management at the Threshold of the 21st Century in Conditions of

within 1 year. Highest credit spreads are generated by Credit Grades model.

but can be successfully applied in the condition of emerging markets.

**Acknowledgements**

the Slovak Republic.

changes in the input parameters in such a long horizon.

Maria Kovacova\* and Boris Kollar

\*Address all correspondence to: maria.misankova@fpedas.uniza.sk

Department of Economics, Faculty of Operation and Economics of Transport and Communications, University of Zilina, Zilina, Slovak Republic
