MBACalculator.com Merton Model Options Pricing - BSOPM

The Merton model refers to a model proposed by Robert C. Merton in 1974 for assessing the credit risk of a company by characterizing the company's equity as a call option on its assets.[1]

This model assumes that a company has a certain amount of zero-coupon debt that will become due at a future time T. The company defaults if the value of its assets is less than the promised debt repayment at time T. The equity of the company is a European call option on the assets of the company with maturity T and a strike price equal to the face value of the debt. The model can be used to estimate either the risk-neutral probability that the company will default or the credit spread on the debt1.

As inputs, Merton's model requires the current value of the company's assets, the volatility of the companys assets, the outstanding debt, and the debt maturity.