For ‘instantaneous’ I get that ‘t’ becomes 0 in the formula
Ie) spread x t => spread x 0
But I also thought that POD x LGD was multiplied by t also giving (POD x LGD x 0). Is this incorrect? Answers I have seen do not multiply POD x LGD x 0
I guess my question is, is S the only variable multiplied by t in the following:
S - (ESD x Chng in S) - (POD x LGD)
The way i have also done it, and someone correct me if i am wrong.
Spread - (Effective Spread Duration x change in Spread) - ( POD x LGD)
The spread and POD is per annum so if 6 months for example times those bits by 0.5.
I agree with you, that’s how I’ve always done it also.
However, an answer I came across recently didn’t multiply the POD by t. t in this case should have been 0 as the change was instantaneous.
The answer was:
(s x 0) - (esd x chng in s) - (pod x lgd)
The last term should have also been multiplied by 0 but wasn’t.
Just wondering if anyone knew if there was a reason for this or if this is likely an error on their behalf.
Yes i saw that question too on the CFA Boston Paper, i still dont fully understand why instantaneous meant it is 0 for POD x LGD. There were lots of comments on that paper and confusion about that question. I wouldnt worry too much about it, i think if you understand the equation you will be fine.