How can we value default risk spread?
Use option pricing
What type of security classes has a firm outstanding?
Debt: Zero-coupon discount bond
Equity: Common Stock
What are problems with the mertons model?
Value of firm cannot be observed
Value of firm is difficult to model
Interest rate are not constant
Multiple classes of outstanding debt with complex priorities
What is the formula for general pricing in the risk neutral valuation?
How can we calculate the risk neutral probabilites?
Which factors are relevant for the risk neutral probabilites?
Risk free rate
Volatility of underlying asset
Last changeda year ago
