What's new


  1. David Harper CFA FRM

    FRM reading Stulz' Chapter 18: Credit Risks and Credit Derivatives 2017-03-20

    Chapter 18. Credit Risks and Credit Derivatives [CR–5] Using the Merton model, calculate the value of a firm’s debt and equity and the volatility of firm value. Explain the relationship between credit spreads, time to maturity, and interest rates. Explain the differences between valuing senior...
  2. sleepybird

    Understanding the relationship between Merton Probability of Default (PD) and the Black-Scholes Mode

    Below I am trying to show the relationship between Merton PD and the BSM. Merton PD = N[ -[ln(V/K)+(μ-0.5σ²)T]/σT ] The formula inside the bracket (let’s name it D2 since it) is very similar to the formula for d2 in the BSM for pricing call option: d2 = ln(S/X)+(r-0.5σ²)T]/σT So we have...
  3. David Harper CFA FRM

    Merton model, a summary of the issues

    Since we get a lot of questions on Merton (some issues are merely notational), I wanted to collect my observations into a single place. I hope you like. (fwiw, I don't endorse it, I blame the prominence of this on Stulz' influence in the FRM :rolleyes: ... the math of the BSM is admittedly...