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Credit spread risk is a risk-neutral probability of default. That is, it includes the expected loss plus a systemic risk premium if one ignores factors like liquidity, counterparty risk, and tax effects. Other posts in this page show how one can calculate a risk-neutral probability of default given CDS spreads. CDS Spread = EL + RP Credit risk is a real-...


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You have 1000 simulated payoffs, now find 1000 simulated P&L's: For Long Call, P&L = simulated payoff - Black Scholes value at time 0 For Short Call, P&L = Black Scholes value at time 0 - simulated payoff Now find the 5% quantile in both cases, i.e. P&L for the 50th worst outcome out of 1000


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