- EXIT_COST – 0.8. We assume the cost of liquidating company is proportional to the firm value.
- RSTR_COST – 0.1. We assume the cost of restructuring debt is proportional to the debt outstanding amount.
- SOFT_DEFAULT_THRESHOLD - . The lender is assumed to take actions to protect the investment when DSCR goes below this value.
- HARD_DEFAULT_THRESHOLD - . The company goes defaulted immediately when DSCR goes below this value.
- MAXIMUM_VOL – 150%, the maximum value of CFADS implied volatility. It is a bit meaningless to have implied volatility more than this value, as the risk is too high.
- MINIMUM_VOL – 5%, the minimum value of CFADS implied volatility. Actually, there is no big difference in term of credit risk when the volatility goes smaller than it.
- MAXIMUM_PD – 1 – MINIMUM_PD
- MINIMUM_PD – 0.0001%, which is about 0.01% chance of default in the 100 years. Both of MAXIMUM_PD and MINIMUM_PD are used because the CFADS scenarios are discretised.
- VOL_ADJUSTMENT – 0.8, constant and calibrated as in Append 5 to adjust the PD inline with the historical experience.