Risk-neutral default probability and real-world (or physical) default probability are used in the analysis of credit risk. Which one of the following statements on their uses is correct?
　　A. Real-world default probability should be used in scenario analyses of potential future losses from defaults, and real-world default probability should also be used in valuing credit derivatives.
　　B. Real-world default probability should be used in scenario analyscs of potential culture losses from defaults, but risk-neutral default probability should be used in valuing credit derivatives.
　　C. Risk-neutral default probabili1y should be used in scenario analyses ofpotential future losses from defaults, and risk-neutral default probability should also be used in valuing credit derivatives.
　　D. Risk-neutral default probability should be used in scenario analyses of potential future losses from defaults, but real-world default probability
　　should also be used in valuing credit derivatives.
　　Answer:B
　　A. Incorrect. Risk-neutral default probability should be used in valuing credit derivatives.
　　B. Correct. Real-world default probability should be used il1 scenario analyses of potential future losses from defaults, but risk-neutral default probability should be used in valuing Credit derivatives.
　　C. Incorrect. Real-world default probability should be used in scenario analyses ofpotential future losses from defaults
　　D. Incorrect. Real-world default probabi1ity should be used in scenario analyses of potential future losses from defaults(17 x 16/2) x (0.00508)2 X (1 - 0.00508)15 = 0.325%

 
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