medium · FRM Part 2 Credit Risk
In a structural model, the 'default risk premium' is represented by the gap between:
- The gap between the stated face value of the debt and the current market value of that debt.
- The risk-neutral Probability of Default and the physical Probability of Default.
- The gap between the asset volatility and resulting equity volatility level.
- The gap between the Distance to Default measure and the resulting EDF value.
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