HW1-4: In this exercise, among other things, we calibrate the risk-neutral default probability of a company...

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HW1-4: In this exercise, among other things, we calibrate the risk-neutral default probability of a company under Merton's structural model, based on has the following information: The value of the company's equity is 3 million USD. The volatility of its equity is 70%. The principal of the debt is 10 million USD and has maturity 1 year (B = 10). The risk free rate is 5%. (a) Determine the values of V and Oy. (b) Using your calculation in (a), compute the one year probability of default. (c) Using your previous calculations, determine the price of the defaultable bond B(0,1). (d) Calculate the corresponding credit spread s (0,1). (e) Calculate the expected value of the recovery rate conditional on default. (f) Compute Q(R > 80% | V < B) and Q(R < 50% | V < B). HW1-4: In this exercise, among other things, we calibrate the risk-neutral default probability of a company under Merton's structural model, based on has the following information: The value of the company's equity is 3 million USD. The volatility of its equity is 70%. The principal of the debt is 10 million USD and has maturity 1 year (B = 10). The risk free rate is 5%. (a) Determine the values of V and Oy. (b) Using your calculation in (a), compute the one year probability of default. (c) Using your previous calculations, determine the price of the defaultable bond B(0,1). (d) Calculate the corresponding credit spread s (0,1). (e) Calculate the expected value of the recovery rate conditional on default. (f) Compute Q(R > 80% | V < B) and Q(R < 50% | V < B).

Answer rating: 100% (QA)

To solve this exercise well follow the steps outlined in Mertons structural model a Determine the values of Vo and b Using the calculation from a comp... View the full answer