Question: a) Do you agree with the following comment? Why? The EDF TM product developed by KMV transforms the distance to default into a default probability

a) Do you agree with the following comment? Why?

The EDF^TM product developed by KMV transforms the distance to default into a default probability based on the assumption that the market value of an asset is normally distributed By its nature, the EDF^TM product works for both publicly traded companies and private firms. (3.5 marks)

b) Collateral is one of the building blocks of a securitisation. Explain how collateral quality affects the credit risk of mortgage-backed securities, and how the deterioration of collateral quality contributed to the global financial crisis (GFC). (4 marks)

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