Using credit risk measures to price intercompany loans
April 06, 2010
Gordon Hands of CUFTanalytics discusses the merits of external credit ratings and forward-looking probability of default as credit risk measures when selecting comparable uncontrolled financial transactions (CUFTs)
Credit risk drives the pricing of debt instruments and is therefore an important search criteria for selecting available market data. Typically the credit risk profile of the related-party borrower has been defined by an estimated (or synthetic) credit rating. Thus, the common credit risk measure in selecting comparable debt instruments has been the credit rating. For example if a tested borrower’s estimated credit rating is a Ba/BB then a search would be made for comparable debt instruments within the whole letter credit rating category of Ba/BB.
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