Maxim Rastorguev
Member
So the situation is like this. A client of us who defaulted recently has a number of nearly distressed bonds which he will give us as a compensation. Accordingly these bonds will become a part of our bond portfolio that constitutes of normal, not distressed bonds. The question to solve is at what price shall I agree to include them in my portfolio.
The other Data are like following:
PD (in accordance to the internal rating) is 42%.
I hope to recover 45% in case of default, so LossRate=1-RR=55%.
EAD=100 usd (for simplicity of course).
Duration is +-1 year.
Bonds have a very tiny market where only retail investors trade sometime, so basically I realize that I won’t sell them even at fire prices because no institutions have credit limits for the issuer. So as they say “the risks are all mine”.
I calculated Expected loss as EAD*LR*PD=100*0,55*0,42=23,1 usd. My first thought was the price should compensate me for the EAD and give some extra return, so let’s say I quote 100-23,1-3,1=80% of notional. Do you think it reasonable? I can also calculate the Unexpected Loss with more or less pricision.Do you think I shall also somehow incorporate Unexpected Loss in the pricing?
Thanks everyone for the thoughts!
The other Data are like following:
PD (in accordance to the internal rating) is 42%.
I hope to recover 45% in case of default, so LossRate=1-RR=55%.
EAD=100 usd (for simplicity of course).
Duration is +-1 year.
Bonds have a very tiny market where only retail investors trade sometime, so basically I realize that I won’t sell them even at fire prices because no institutions have credit limits for the issuer. So as they say “the risks are all mine”.
I calculated Expected loss as EAD*LR*PD=100*0,55*0,42=23,1 usd. My first thought was the price should compensate me for the EAD and give some extra return, so let’s say I quote 100-23,1-3,1=80% of notional. Do you think it reasonable? I can also calculate the Unexpected Loss with more or less pricision.Do you think I shall also somehow incorporate Unexpected Loss in the pricing?
Thanks everyone for the thoughts!
