LOS 38 Expected loss vs PV of expected loss
Statement 1:The expected loss metric and present value of expected loss metric differ only in terms of time value of money and discounting of expected future losses.
statement 1 is most likely:
incorrect, because the expected loss computation uses risk-neutral probabilities.
incorrect, because the present value of expected loss also adjusts default probabilities to capture the riskiness of the cash flows (i.e., the risk premium).
Can someone help me with this question? I know that for the Structural model, the expected loss metric uses a growth rate, while the PV of expected loss uses a risk free. But what about the reduce form? How does the reduce form expected loss and PV of expected loss capture riskiness of the cash flow?
Study together. Pass together.
Join the world's largest online community of CFA, CAIA and FRM candidates.