VaR Model Based on SMEs Credit Guarantee Risk Pricing

Chinese government is seeking to encourage small and medium sized enterprises (SMEs) growth which requires expansion capital. Comparing with larger firms, SMEs are less access to the debt capital they need for start-up, growth, and survival. Consequently, some commercial agencies have often intervened in credit markets by taking on the role of guarantors of loans that financial institutions advance to SMEs, such as CHORIENWISE, a famous Chinese commercial guarantor, provides guarantees of loans made by financial institutions to qualifying small firms. With the development of credit guarantee industry, as a high-risk industry, it is extremely important to set a scientific price in the guarantee contract in order to cover the loss of guarantee failure. At present, the approaches of credit guarantee pricing are mainly empirical pricing method and option pricing method. Combining with the international VaR model, this thesis analyzes the limitation of the practical use of these two methods and gives out a guarantee pricing method which is based on the credit guarantee risk. By using this approach, in a certain confidence level, at least, the guarantee agency can get the risk-free profit.