Chapter 19: Structural Credit Risk Models

In this section

• Merton Model Basics
  Discover how the Merton model interprets equity as a call option on a firm's assets, estimating default risk by comparing asset value to debt obligations under a structural framework.
• Equity as a Call Option on the Firm’s Assets
  Explore how equity holders effectively hold a call option on the value of a firm’s assets in structural credit risk models, including Merton’s framework, key formulas, and real-world considerations.
• Strengths and Limitations of Structural Models
  Explore the key advantages and drawbacks of structural credit risk models, focusing on the economic rationale, market-based insights, and challenges in capturing real-world complexities.
• Vignette Scenario: Calculating Distance to Default
  Explore how to implement the Merton model to measure a firm's distance-to-default, estimate default probabilities, and perform structural credit risk analysis.