Thread starter
#1

Goodmorning,

this is my first post on BT, i hope not to violate any of the forum rules.

As you can see in the post description, my question regard the modeling of default time laid out in the book FRM PART II Credit Risk Measurement and Management, Chapter 8 page 172.

What I'm struggling to understand is the definition of default time used in the book.

The author simulate

The meaning that I attribute to this

I'm struggling to understand this example.

Could anyone help me?

this is my first post on BT, i hope not to violate any of the forum rules.

As you can see in the post description, my question regard the modeling of default time laid out in the book FRM PART II Credit Risk Measurement and Management, Chapter 8 page 172.

What I'm struggling to understand is the definition of default time used in the book.

The author simulate

**standard normal variables***N***find the CDF corresponding value and use it to derive the time (***Z,***t**) element from the cumulative default time distribution**t = log(1- CDF(z))/Lambda***.*The meaning that the book attribute to this**t**is the EXACT time when the default occurs of the nth security, confirmed by the fact that based on this value the security default is allocated to one of the 5 years of the securitization life to calculate the cashflow waterfall.The meaning that I attribute to this

**t**is that the nth security has a**1-CDF(Z)**probability of defaulting BEFORE time t, thus default could occur in any of the 5 years, leading to 5 possible different cashflows structures.I'm struggling to understand this example.

Could anyone help me?

## Stay connected