PD and LGD Merton formulae

[Peter van Vliet]

David (or Suzanne). Do you think we need to memorize the formulae for PD and LGD under Merton? Not being lazy, just want to use my time and energy wisely.
Makes me think a bit of the greek fomulae of lvl one, quite complex but never really applied in the exam.

 

[David Harper CFA FRM]

Hi Peter,

You definitely do NOT need to memorize, or even consider, Merton LGD: we got it successfully removed from the AIMs due to it's esoteric and inaccurate nature.

With respect to Merton PD formula, I assume you saw my note here on Merton?
I think it's a useful memorization, although maybe 50/50, or less, on it being quizzed (with a good chance it would just be displayed for you). GARP also just queries the simpler lognormal distance to default (as opposed to the returns-based normal DD) for example, from the 2011 sample http://forum.bionicturtle.com/threa...claim-approach-and-the-kmv-model-credit.4181/

I hope that helps, thanks,