Financial Simulation Modeling in Excel by Keith Allman & Josh Laurito & Michael Loh

Author:Keith Allman & Josh Laurito & Michael Loh
Language: eng
Format: epub
ISBN: 9781118137222
Publisher: Wiley
Published: 2011-08-27T04:00:00+00:00

The output of these models is the probability that a company will default. Since we make the assumption of normalcy when we use the Black-Scholes model, we can state the probability in terms of the number of standard deviations from the mean scenario we see a default. This is referred to as the “distance to default” or DD, and is typically calculated with equation 5.4:

(5.4)

If this is confusing, do not fret. We will walk through these calculations later in the chapter.

SHORT-TERM AND LONG-TERM LIABILITIES: THE BARRIER AND CALIBRATION

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