In Blue Box Ex 1, from where do we get this formula for POD approximation?
The idea is that the spread exactly compensates you for the expected loss, so:
spread = E\left(loss\right) = POD \times LGD
It would have been nice if they’d mentioned that explicitly somewhere.
Thank you so much Sir…makes sense now…U r simply the best…
My pleasure.
You’re very kind.
If you look at the paragraph just below Exhibit 2 it is all mentioned there…
Spread = LGD x POD
POD = Spread/LGD
Voilà!