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Dr. Th. Goswin. 2. Agenda. ▫ Idea. ▫ Merton Model.

▫ Idea. ▫ Merton Model. ▫ The iterative approach. ▫ Example: In 1974, Robert Merton proposed a model for assessing the structural credit risk of a company by modeling the company's equity as a call option on its assets. The Risky Debt: Merton's model.

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One-factor Merton model 2 (1) Single Index Model 3 (2) Multi Index Model 3 3. Estimating the asset correlations 3 (1) Reasons for selecting Multi Index Model 5 (2) Grouping criteria and asset correlation 7 I. Industry 7 II. Company size 9 III. Credit rating 12 IV. Region 15 4.

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▫ The iterative approach.

Risk-Free Interest Rate (r) % d z d } v o µ o } & v > } À o o rz ) 5 !khqfh : ( 4 4 ; 5 6!khqfh ) 5 ! dqg vr )!5 dqg zh qhyhu kdyh wkh sureohp ri wkh uhvlvwlyh irufh h[fhhglqj wkh prwlyh irufh dqg khqfh qr frqwudglfwlrq , zrxog khuh olnh wr uhlwhudwh wkdw wklv qrwdwlrq lv In 1974, Robert Merton proposed a model for assessing the structural credit risk of a company by modeling the company's equity as a call option on its assets. The Merton model uses the Black-Scholes-Merton option pricing methods and is structural because it provides a relationship between the default risk and the asset (capital) structure of the firm. Scholes-Merton model and a calculator or the pricing table in the Appendix.Assume that, though you are unsure of the standard deviation of returns on the assets under consideration, you are confident that s is at least 40% per year and no more than 60%.
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Browse other questions tagged merton-model default-probability or ask your own question. Featured on Meta Stack Overflow for Teams is now free for up to 50 users, forever. Related.

Calculate the value of stock options using the Black-Scholes Option Pricing Model.
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Well known structural models of credit risk come origin mostly from the-oretical Merton’s works (1974, p. 449-470), which became theoretically exten-ded and practically implemented by the KMV Corporation. Chapter 15. The Black-Scholes-Merton Model Practice Question set contains 20 pages covering the following learning objectives: * Explain the lognormal property of stock prices, the distribution of rates of return, and the calculation of expected return.

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Revised May 2003. This worksheet illustrates the use of Merton model to value risky debt. In this model, a non-dividend paying Sep 28, 2012 PD Modeling using Merton's structured approach.