Merton's model, credit risk and volatility skews

John C. Hull, Izzy Nelken and Alan D. White

Journal of Credit Risk

Abstract: ABSTRACT In 1974 Robert Merton proposed a model for assessing the credit risk of a company by characterizing the company’s equity as a call option on its assets. In this paper we propose a method for estimating the model’s parameters from the implied volatilities of options on the company’s equity.

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