- Thread starter Nicole Seaman
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Hi David and Nicole,

here one more typo in the same reading De Laurentis, Chapter 3 "Ratings Assignment Methodologies" on page 21:

View attachment 1378 View attachment 1379

The cumulated normal disribution operator N is missing.

Thank you and kind regards!

here one more typo in the same reading De Laurentis, Chapter 3 "Ratings Assignment Methodologies" on page 21:

View attachment 1378 View attachment 1379

The cumulated normal disribution operator N is missing.

Thank you and kind regards!

I also noticed the missing N in the PD formula.

Would be good to get it fixed please.

Thanks

Karim

@Nicole Seaman

I think there's an error in R43-P2-T6 Stulz Ch 18 Study Notes.

On page 4 you have the excerpt below saying Debt holders receive Max(F-Vt,0), but for example if the firm value is 80 and the face value of debt is 100, don't the debt holders get 80 back rather than (100-80)=20?

Screenshot:

Thanks

Karim

"If the debt is risky, there is no guarantee the principal amount will be repaid in full. Specifically, if the value of the firm falls below the principal amount, if V(T) < F, then the firm is insolvent and the debt holders can only recover the firm's value. Therefore, the payoff to debt holders is Min[V(T), F]; i.e., their payoff must be at least equal to the firm's value but cannot be greater than the principal amount. Further, Min[V(T), F] = F - Max[F - V(T), 0], which illustrates that the debt holders' payoff is economically equivalent to the debt principal *minus* the payoff of a put option on the firm's assets, V(T), with an exercise price equal to K. Consider the same example where F = $100. If V(T) = $120, then debt holders receive Min(100, 120) = 100 - Max(100 - 120, 0) = $100. But if V(T) = $80, then debt holders receive Min(100, 80) = 100 - Max(100 - 80, 0) = $80."

R44.P2.T6 Malz Study Notes page 42:

I think the Default01 formula should have 1/20 multiplied by the difference in the next 2 terms rather than just being 1/20th of the 1st term.

Current formula:

What I think it should be:

Default01 = 1/20 * [(mean value/loss for Pi + 0.0010) − (mean value/loss for Pi − 00.0010)]

Thanks

Karim

Thread starter
#28

Hi @David Harper CFA FRM

R44.P2.T6 Malz Study Notes page 42:

I think the Default01 formula should have 1/20 multiplied by the difference in the next 2 terms rather than just being 1/20th of the 1st term.

Current formula:

View attachment 1510

What I think it should be:

Default01 = 1/20 * [(mean value/loss for Pi + 0.0010) − (mean value/loss for Pi − 00.0010)]

Thanks

Karim

R44.P2.T6 Malz Study Notes page 42:

I think the Default01 formula should have 1/20 multiplied by the difference in the next 2 terms rather than just being 1/20th of the 1st term.

Current formula:

View attachment 1510

What I think it should be:

Default01 = 1/20 * [(mean value/loss for Pi + 0.0010) − (mean value/loss for Pi − 00.0010)]

Thanks

Karim

Can you confirm that this is an error in the notes? Thank you!

Nicole

So which notation is correct? Also, could someone clarify the notations for other variables as well?

Thank you.

Question 708.3 is correct:

- CVA --> LGD(counterparty)*EE(counterparty)*PD(counterparty)

- DVA -->LGD(institution)*EE(institution)*PD(institution)

- CVA --> LGD(counterparty)*EE(counterparty)*PD(counterparty)*PS(institution)

- DVA -->LGD(institution)*EE(institution)*PD(institution)*PS(counterparty).

You are correct, but also the source text contains an error too (actually the source De Laurentis is a mess of errors)

Hi @JulioFRM Yes, I **absolutely agree**, it is** our mistake in the text**. Thank you, and apologies for any confusion. It can be difficult to follow Stulz's confusing language, but it should read:

"If the debt is risky, the debt holders are not guaranteed full repayment of the principal amount, F. Specifically, if the value of the firm falls below the debt's principal amount, then the debt holders can only be repaid the (reduced) value of the firm; i.e., if V(t) < F then debt repayment equals V(t). This can be*restated in option terms*: if the value of the firm falls below the principal amount to be repaid, then the debt holders receive the face value *minus *the difference, F - V(t). That is, if V(t) < F then debt repayment F - [F-V(t)] = V(t). In this way, we can express the repayment in option terms that accommodates any future V(t):

D(T) = F - Max[F - V(t). 0] = F - [Put option on firm's assets, V(t), with exercise price of debt principal, F]"

Thank you!

@Nicole Seaman after i replied, I noticed this had already been captured. (and it's already in wrike). Moved to this thread.

"If the debt is risky, the debt holders are not guaranteed full repayment of the principal amount, F. Specifically, if the value of the firm falls below the debt's principal amount, then the debt holders can only be repaid the (reduced) value of the firm; i.e., if V(t) < F then debt repayment equals V(t). This can be

D(T) = F - Max[F - V(t). 0] = F - [Put option on firm's assets, V(t), with exercise price of debt principal, F]"

Thank you!

@Nicole Seaman after i replied, I noticed this had already been captured. (and it's already in wrike). Moved to this thread.

Last edited:

Thread starter
#40

default correlation should be like below I believe..

View attachment 1800

if you please see it is like below in the doc.

View attachment 1801

View attachment 1800

if you please see it is like below in the doc.

View attachment 1801

Can you post the specific reading that you are referring to and if possible the page that this is located on? This thread is for all readings in Topic 6, so it is helpful to know which reading you are referring to so I don't have to search through everything. I want to make sure this is fixed in the document.

Thank you,

Nicole

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