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Questions tagged [default]

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2
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0answers
76 views

Methods for calculating Expected shortfall

Let B1, B2 be two defaultable zero-coupon bonds maturing in 1 year, each with a face value of $100. Assume: each bond is priced at 90 dollars each bond has a 4% probability to default within 1 year ...
2
votes
2answers
36 views

Are Credit Default Swaps used by B2B Service providers or Vendors?

I understand CDS's are often employed in trading strategies between institutions - That is well publicized. What isn't as publicized is how other customers might look to use a CDS. I work in an ...
2
votes
1answer
37 views

Annualized actual probability

I have a dataset of bank loans over different periods. Let's say that most of the loans have a horizon over 5,10,15 years. I obtain the actual default rate over these different type of loans. I would ...
0
votes
3answers
191 views

cva for a collateralised swap

For a swap thats fully collateralised once a day, i suppose that the cva measures risk only for the intraday chance of counterparty default? Surely thats tiny enough to be neglible, or am i missing ...
2
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0answers
54 views

LGD performing model - LGD estimate vs LGD observed

LGD (Loss Given Default) performing model is developed on through the cycle sample which consists of loans in default. What I want is to compare LGD estimate and LGD observed (realized). LGD observed ...
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0answers
65 views

How to determine the default probability of a county in a bond that is not in its native currency?

Disclaimer: This post is cross posted in here also. Consider the following case: Country P uses the currency Euro and gives p percent interest on a one year bond issued in Euro. Country Q uses the ...
8
votes
2answers
2k views

KMV-Merton Probabilties of Default vs Moody's EDF

Moody's used to publish probability of default estimates from their Moody's EDF model, but they have temporarily discontinued it. I understand that the Moody's EDF model is closely based on the Merton ...
0
votes
1answer
317 views

conditional probability of default

I would like to ask the following question. I would appreciate if someone could help me out. On what argument is based that states that conditional default rates ( loans of corporate borrowers) ...
2
votes
2answers
591 views

Accrual in Default Derivation of Credit CDS Curve

In Trading Credit Curves Part I by JP Morgan we have that each point on a credit (CDS) curve represents: $$PV(\text{Fee Leg}) = PV(\text{Contingent Leg})$$ which is $$S_n \sum_{i=1}^{n}\Delta_i ...
3
votes
0answers
105 views

How can we price an option taking into account the “issuer risk”?

I'm trying to take a closer look to option pricing in a risky environment. Let's say a firm $A$ sells me an (European) option on an underlying $S$ (which of course can be any other financial product ...
1
vote
0answers
42 views

Can hazard rate intensity models be used with bonds?

We are trying to build a risk neutral PD Model for institutions without CDS. In Malz's "Financial Risk Management: Models, History and Institutions", Chapter 7, its said that we can extract the ...
3
votes
1answer
94 views

Simplifying an expectation function of default time and rates

I have the following expectation to calculate : $$ \mathbf{E}\left[ e^{\int_{t_0}^{\tau} r_s ds} \mathbf{1}_{\{\tau < T\}}\right] $$ More precisely, I want to show that : $$ \mathbf{E}\left[ e^{\...
0
votes
1answer
408 views

Probability default calculation

I want to calculate default of probability of internal ratings for a particular bank. I have only the following data: Liquidity Ratio short-term assets / short-term liabilities = 2.6 Profitability ...
11
votes
1answer
4k views

What is the unit of the Distance to Default measure?

I read in a book that the distance to default of a company is "2.978". Can anyone please tell me what is the unit implied behind this measure? Are they "years" for instance?
2
votes
2answers
477 views

Probability of default

I have to calculate probability of default (PD) rates for our clients (I am working in a Bank) based on clients' financials. Could you, please, advise me how to do that? I think we have two Options: ...
0
votes
0answers
104 views

probability of default for Kolomogorov backward equation

suppose $$dA = \mu Adt + \sigma AdX.$$ is a geometric Brownian motion. One says that the Probability $P(A,t)$ of $A$ reashing the critical level $K(t)$ before maturity: $$\dfrac{\partial P}{\partial ...
1
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0answers
71 views

Pricing defaultable asset with finite maturity

Assume a stochastic process $X_0 = 0$ and $X_t = \nu t + \sigma W_t$ where $W_t$ is standard Brownian motion and $\nu$ is a drift (can have $\nu \leq 0$ if necessary, but prefer it to be general), ...
2
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0answers
67 views

Calibration of intensity model

I could use some advice on calibration of stochastic intensity models. I am thinking that the CIR model is most suitable, as it can not take negative values (when feller condition is satisfied). I ...
6
votes
1answer
152 views

Best simplified way to model volatility in returns of an investment in a risky fixed income asset

I am currently working on a project where I have analyzed a certain category of fixd income instruments, and I now have the gross aggregate yield as well as the theoretical gross-aggregate default-...
2
votes
0answers
70 views

How are CDS prices calculated for financial institutions?

If you need to estimate the fair price of a credit default swap on a financial institution, can it be done? Typical structural models tend to break down for the complex debt and asset characteristics ...
1
vote
0answers
75 views

Fair Price CDS Spread for a Bank

I have been using CreditGrades to calculate fair one year CDS spreads for firms. However, the authors of the model explicitly say that the model does not hold for banks or financial firms. If I need ...
8
votes
3answers
3k views

How is the default probability implied from market implied CDS spreads for CVA/DVA calculation?

From point 38 on P.17 the default probability can be implied from market implied CDS spreads. "Macro Surface" method is mentioned, but I cannot get any clue of what it is? Where do I get the acedemic ...
1
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0answers
56 views

Alternatives to CDSs for default term structure?

The CDS market seems to be drying up, funding&liquidity issues are now prevalent over credit, so other sources for default probabilities are needed. What else is commonly used to obtain a ...
3
votes
1answer
169 views

Summary statistic for the average probability of default?

I have the following scenario: Let $X_i$ denote the event where some institution $i$ 'defaults' (don't worry about the exact definition of a default here, it is not relevant to the question at hand). ...
3
votes
0answers
225 views

default probability

Suppose the hazard rate is $\lambda$ the default probability density function follow exponential $f(t) = \lambda e^{-\lambda t}$ and cumulative probability function is $F(t) = 1 - e^{-\lambda t}$ ...
2
votes
0answers
408 views

Obtaining the default probability and recovery rate for each credit rating?

I have the following questions for obtaining the credit rating: Given that I have cumulative default probability of each credit rating from Global Corporate Average Cumulative Default Rates (1982-...
1
vote
0answers
881 views

Question about Merton model to estimate default probability and recovery rate of the company

I recently come across Merton's model to estimate the default probability and recovery rate of the company. Here is the inputs ...
2
votes
1answer
2k views

What is the difference between a recovery swap and a CDS?

As I understand it, recovery swaps and CDS are both used to privide hedging against the default risk of a loan. What is the difference between them?
2
votes
2answers
947 views

Hedging credit risk using Put equity options

I am looking for some paper or similar which deal with this topic: hedging bankruptcy on firm's debt using Put options written on that firm's equity price. This should be based on the assumption that ...
3
votes
0answers
64 views

Credit spreads vs default events dependence

Reading this note it strikes me that credit spreads and defaults seem not to be commonly modeled jointly (e.g. more or less directly in structural models), but at best with some kind of "ex post" ...
6
votes
0answers
418 views

is there a mapping from Altman Z-score for private companies to bond ratings or probability of default?

On wikipedia, there is a formula to calculate the Altman Z-score for private companies: Z-score estimated for private firms: T1 = (Current Assets − Current Liabilities) / Total Assets T2 = Retained ...
6
votes
1answer
469 views

Are there any well known methods of testing through-the-cycle rating systems?

Rating systems, as defined by the Basel II Accord, can be classified into two broad types - through-the-cycle (TTC) or point-in-time (PIT) - and the probability of default predicted by such a system ...
13
votes
1answer
5k views

How to estimate probability of default from bond prices?

How do you use bond prices/yields to infer probabilities of default? I would think of it as follows: Create a relationship between default free (e.g., Germany) and defaultable (e.g., Greece) bond ...