What Is the Merton Model?

The Merton model is a model used to price corporate debt. The model was developed by Robert C. Merton in 1974. The model takes into account the possibility of default by the firm, as well as the recovery rate in the event of default. The model is used to price debt securities such as bonds. The Merton model is also known as the structural model of corporate debt.

What is the Vasicek model credit risk?

The Vasicek model is a mathematical model used to estimate the probability of default on a corporate debt obligation. The model is named after its creator, Czech-American economist Oldřich Vasicek.

The model is based on the assumption that the probability of default is a function of the current level of debt, the level of debt at the time of the last default, and the time since the last default. The model can be used to estimate the probability of default for a single firm, or for a portfolio of firms.

The Vasicek model is generally considered to be a simplification of the Merton model, which is a more complex model that takes into account the stochastic nature of asset prices.

What does KMV stand for in finance?

KMV is an acronym for "Kondor+" and "Moody's KMV" which are both financial risk management software applications. Kondor+ is used for managing credit risk in portfolios of corporate debt, while Moody's KMV is used for measuring the probability of default for individual companies.

Which of the following is not an assumption of Black Scholes model?

Assuming the stock price follows a geometric Brownian motion, the Black Scholes model can be used to determine the price of a European call or put option. The model assumes that the stock price is at a constant risk-free rate, that there are no dividends, and that there are no transaction costs.

Which distribution do asset values have in the Merton model? In the Merton model, asset values have a lognormal distribution. This means that they are distributed according to the normal distribution, but with a logarithmic transformation. This transformation makes the distribution more symmetrical and makes it easier to model asset values that can take on both positive and negative values.

What are the assumptions of Black Scholes model?

The Black-Scholes model is a mathematical model for pricing financial derivatives, first proposed by Fischer Black and Myron Scholes in 1973. The model is used to derive the Black-Scholes formula, which is used to price options.

The model makes the following assumptions:

- The underlying asset price follows a geometrical Brownian motion.

- The underlying asset does not pay dividends.

- There is no arbitrage opportunity.

- The risk-free interest rate is known and constant.

- Trading in the underlying asset is continuous and frictionless.

- There are no transaction costs.