Default Probabilities [DP] are never readily observable, but have to be determined quite often for all your existing customers and more so for the customers who are paying late.
Steps to determine default probabilities:
- Analyze the customers latest financials and assign an internal rating.
- Analyze historical financials data and internal rating.
- Analyze default frequency of entities with similar internal ratings.
- Analyze recent news and changes of customers.
- Analyze the customers social chatter.
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