I. Stochastic Models and Processes · 12. novembre 2023

The Merton model, essential in credit risk analysis, views a company's equity as a call option on its assets, crucial for default probability assessment. Using the Black-Scholes formula, it combines equity with zero-coupon debt for valuation. Despite its innovativeness, the model's reliance on market data and idealistic market assumptions limit its applicability. This has spurred alternative approaches like reduced form models, addressing these shortcomings in credit risk evaluation.

III. Quantitative Finance Applications · 10. novembre 2023

Convertible bonds blend debt and equity, featuring an option to convert into a set number of shares. Key factors include conversion ratio and price. Valuation hinges on stock dynamics, credit risk, and hazard rate. At maturity, value is the higher of face value or conversion outcome. Monte Carlo simulations help in pricing, considering callability and putability options. #ConvertibleBonds #CreditRisk #FinancialModeling #InvestmentStrategies