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A model of credit risk based on cash flow

✍ Scribed by Marek Capinski

Publisher
Elsevier Science
Year
2007
Tongue
English
Weight
617 KB
Volume
54
Category
Article
ISSN
0898-1221

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✦ Synopsis

An extension of the structural Merton's model of risk of default is proposed. It is based on an analysis of possible sources of liquidity problems leading to bankruptcy. Pricing of a debt subject to default risk requires finding a value of an American put option, which is performed by a Monte-Carlo simulation of a discretisation of the underlying stochastic equations. This also allows an estimation of the probability of default.

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