KMV Distance to Default vs BSM Formulas

[David Newing]

Hi,

Can any one please help me out with this one: why is the following expression different in the KMV DtD formula and the Black Scholes formula where, as far as I understand, they are trying to achieve the same thing:

KMV: (u-0.5sigma^2)t
BS: (r+0.5sigma^2)t

so in KMV volatility is reducing the mean returns whereas in the BSM it is increasing the mean returns….?

Any help would be much appreciated!

[Anonymous]

May u pliz provide with reference to the handbook the source of your question

[Author]

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