Probability Default in Black Scholes Formula: A Qualitative Study
Journal of Business and Economic Development
Volume 2, Issue 2, May 2017, Pages: 99-106
Received: Nov. 8, 2016; Accepted: Dec. 26, 2016; Published: Jan. 24, 2017
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Authors
Amir Ahmad Dar, Department of Mathematics and Actuarial Science, B. S Abdur Rahman Uinversity, Chennai, India
N. Anuradha, Department of Management Science, B. S Abdur Rahman Uinversity, Chennai, India
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Abstract
A default risk is the risk that a person or an organization will fail to make a payment that they have promised. There are many models that help us to analyze credit risk, such as Default Probability, Loss Given Default, and Migration Risk. All these models are important for evaluating credit risk, but the most important factor is the Probability of Default that is mentioned in this paper. This paper uses the Black Scholes formula for European call option to find the probability default of a firm. How d2 in Black schools model became the probability default of a Merton model. Merton model is the structural model because it is using firm’s value to inform the probability of firms default and here we are going to show the relationship between Black Scholes European call option and the probability of default of a firm. The main aim of this paper is to describe the factor that affects the default probability default using Black Scholes model for European Call option by the help of some examples.
Keywords
Black Scholes Model, Merton Model, Probability Default, Probability Distance
To cite this article
Amir Ahmad Dar, N. Anuradha, Probability Default in Black Scholes Formula: A Qualitative Study, Journal of Business and Economic Development. Vol. 2, No. 2, 2017, pp. 99-106. doi: 10.11648/j.jbed.20170202.15
Copyright
Copyright © 2017 Authors retain the copyright of this article.
This article is an open access article distributed under the Creative Commons Attribution License (http://creativecommons.org/licenses/by/4.0/) which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.
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