We construct a locally risk-free self-financing portfolio $Xt$, at time $t$, with $\Deltat^1$ share of debt and $\Deltat^2$ share of equity. That is, \begin{align*} Xt = \Deltat^1 Dt + \Deltat^2 Et.... Read More

You can first compute the average PD - few choices would be: Simple average of the individual PDs Exposure weighted average of the PDs If the PDs range is too large, then you might want to bucket th... Read More

Economic Capital (EC) covers potential losses under normal conditions, whereas Regulatory Capital (RC) covers potential losses under stressed conditions. Thus, is not uncommon for the RC to be grater... Read More

Here is the excel formula with steps: =NORMSDIST((NORMSINV(0.02)+NORMSINV(0.999)×SQRT(0.1))/SQRT(1−0.1)) =NORMSDIST((−2.054+3.09×SQRT(0.1))/SQRT(1−0.1)) =NORMSDIST(-1.135) =12.8% They keep changing t... Read More

In this context, I believe carry refers to the sum of "pure" carry + roll down. Carry, in the most general sense, is the return of a position in a static world; i.e., assuming time is the only variab... Read More

Yes, you can assume that, since you cannot extract the probability of default for shorter maturity, but for the 5-years only CDS one, because of unavailability of data. Of course, you'll have to upda... Read More

Actually the problem is that the probability of default the second year is conditioned by the default the first year. So you have to multiply 4%101.2199%, because 1% of the times it has already defau... Read More

As I see it, the term $\Pi_B(t, T)$ is the value of the derivatives already owned by the bank. So, it's not some price they need to pay but an asset on the balance sheet. This increase in asset value... Read More

Hi am having to write as an 'answer' as am new to forum. We used stochastic intensity models on desk from a while back. Generally Black-Karasinski to avoid negative hazard rates (and for useful feat... Read More

CDX is available from Bloomberg at no extra cost, though they do not (so far as I know) form a total-return series that takes rolls into account. See, for example, CDX HY CDSI S19 5Y PRC Corp or Bloo... Read More