Page History

...

• given a value for CFADS volatility 

  LaTeX Math Inline
  body \sigma

  , we can compute the expected value of debt and the expected value of equity, as is done in standard option pricing, using the equity risk premia derived from our asset pricing methodology.
• in the same process, we also produce a number of scenarii of the CFADS which include an number of default and restructuring scenarios
• given these scenarios, we can compute credit metrics: the probability of default, loss given default and expected loss
• we pick the value of 

  LaTeX Math Inline
  body \sigma

   that best fits the fundamental relationship between book and market value by solving 

  LaTeX Unit
  body FirmValue(\sigma) = TotalAssetValue

• This process can be re-interated to compute the credit risk metrics of each firm on each valuation (quarter end) date. 

...

• the observed book value of the firm
• the estimated equity risk premia and relevant interest rate curves
• expected (forecast) CFADS at the time of estimation
• future aggregate senior debt service at the time of estimation

...