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

"The EDFTMproduct 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 EDFTMproduct works for both publicly traded companies and private firms".

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).

2.

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

"The EDFTMproduct 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 EDFTMproduct 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)