medium · FRM Part 2 Credit Risk
A credit analyst is comparing structural and reduced-form models for pricing a Credit Default Swap (CDS).
Which of the following best describes a typical advantage of the reduced-form (intensity) approach?
- It eliminates the need for market spreads as inputs, relying solely on traded equity prices.
- It provides a forward-looking economic explanation for default based on the firm's leverage and asset volatility.
- It is preferred for 'what-if' leverage analysis because it treats the default barrier as a constant percentage of debt.
- It allows for a 'perfect fit' to the observed market credit curve and can incorporate jump-to-default risk.
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