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If there are 10 issuers and one defaults this year, the issuer weighted probability of default is 0.1. But if the one issuer that defaults is one with a larger than average amount of debt outstanding, the dollar volume weighted rate of default for the year is going to be > 0.1. Moody's tries to predict the default of issuers, so they mostly work with ...


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EAD can also be higher than credit limit because of adding the costs of collection activities, noting that these can take a long time. As you mention, the credit limits will tend to have been maxed out, but also missed payments and accruing interest may have increased the exposure before the point in time at which the default is established (definitional ...


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From mathematical perspective, EAD is the sum of contingent limit amount multiplied by cash conversion factor and cash and non cash exposures (all type of loans that is already allocated to the client)


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Yes you can use implied default intensities to price Bonds if you have a quoted CDS for the issuer of the Bond or for an issuer with roughly the same characteristics even tough that's not the best thing to do. You can also avoid the whole CDS dilema with a repo on the security itself, and in this case counterparty risk is fully taken by the repoer... @Edit:...


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All that you have highlighted is well posed. It makes sense to use conditional PD values applied to the remaining balance. In fact, the expected loss is indeed a measure used to understand how much exposure one has to the default of the counterparty. Therefore, if a counterparty has paid back a part of the debt, then the only default risk exposure is on ...


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Disclaimer: these are just opinions, I do not necessarily have authoritative knowledge in this topic. If you consider the traditional Sharpe definition: $$S = \frac{reward}{risk}$$ where reward is the expected return (above risk free rate) and risk is the standard deviation of reward, it is not clear to me how your augmented Sharpe ratio is related to this....


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I think the idea behind this is to obtain the default probability given the CDS spread (premium) at each time period $t$. Let´s check how. First, at $t=0$, the CDS contract has a value of zero (cost nothing to get in to the contract). So, the cash flow for the buyer and the seller of the contract should be the same (premium leg = protective leg). For the ...


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