Aug 09

Using credit migration matrix and Merton model to solve for equity cushion – 9 min screencast

by David Harper, CFA, FRM, CIPM

FRM |

Yesterday I added to the member page a spreadsheet: RM Target PD implies equity cushion (advanced). Due to its difficulty, here is a screencast walk-through. Note the are two big steps:

  • The firm expresses a risk attitude (orientation) and uses the credit rating migration/transition matrix to derive an implied target probability of default (PD)
  • The Merton model is used to infer a target equity cushion given the target PD

Here is the screencast:

Comments

  1. Be the first to leave a comment!

Leave a Comment