Please open the attached excel file for the example.
Assume I am valuing the cash flows of a simple company with contracts
'a' through 'f' that have different varying cash flows over 10 years.
Probability of default for each contract a-f in any given year = 2.50%.
Once there is a default, the cash flows cease and there is no ability to
recover future cash flows. Defaults are not correlated.
What is the expected value of cash flows for each year? How do I model
this?
Do we need to assume a normal distribution?
What happens if I increase the number of contracts?
What if two of the contracts had some correlation of defaults? Three
contracts? Assume 25% correlation.
What is the expected value? How do I model this?
Thank you!!!
Mathematics Homework Solutions
#84200
Probability problem
Please open the attached excel and word files for the example.
Assume I am valuing the cash flows of a simple company with contracts 'a' through 'f' that have different varying cash flows over 10 years.
Probability of default for each contract a-f in any given year = 2.50%. Once there is a default, the cash flows cease and there is no ability to recover future cash flows. Defaults are not correlated.
What is the expected value of cash flows for each year? How do I model this?
Do we need to assume a normal distribution?
What happens if I increase the number of contracts?
What if two of the contracts had some correlation of defaults? Three contracts? Assume 25% correlation.
What is the expected value? How do I model this?
This shows how to work with expected value with cash flows and contracts.
What is this?
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