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Distance to default $DD$ should be measured in standard deviations. You convert this into a probability $p_{default}$ using the normal CDF: $p_{default} = N(-DD)$. So if $DD = 2.978$ then the firm is about 3 standard deviations from default and has a $\frac{1 - 0.997}{2} = 0.0015 = 0.15 \%$ chance of defaulting in the next period. I divided by two because ...

In practice, I would begin with the recovery assumption. In the case of Greece, dealers are probably already quoting recovery swaps, allowing you to set this parameter directly. In general, you have to be willing to make assumptions based on history or on conversations with bankruptcy experts. Once I have the recovery assumption, I can take any ...

This is, of course, a very old play. The main thing that gets in the way of trading it is that puts are rarely available in a quantity that matches typical credit instrument notionals. Here's a decent paper by Peter Carr on the topic, see equation (4) and surrounding.

I think the national regulators are more concerned with downturn LGD (sort of TTC LGD) rather than a TTC PD. Therefore most rating systems which I encounter are closer to being PIT and thereby easier to validate using the techniques you mentioned and also to backtest. But in any case, model validation is a very subjective field despite the various ...