Explanation:
The KMV model utilizes an expected default frequency (EDF) mapped from the calculated distance to default. This mapping does not rely on a standard normal distribution but instead maps the distance to default against an extensive, empirical database of historical default rates collected over time.
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Q.62 A financial analyst is evaluating a firm using the KMV model to estimate the firm's probability of default. The analyst has calculated the firm's distance to default and now needs to determine the probability of default. Which of the following best describes how the KMV model maps distance to default to probability of default?
A
By applying a standard normal distribution to the distance to default
B
By using a Poisson distribution based on the firm's past default history.
C
By deriving an empirical distribution of default frequencies from historical data.
D
Through a constant default probability.
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