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Hard · options_pricing · Quant Researcher interview question · options-pricing, credit-risk, merton-model, newton, black-scholes
Merton's (1974) structural model treats a firm's equity as a European call option on its assets, with the face value of debt as the strike price. This framework allows for the estimation of unobservable asset value and volatility from observable equity market data. The model is foundational in quantitative finance for credit risk analysis, particularly for calculating default probabilities and credit spreads. Task Implement the function solution(E: float, sigma_E: float, D: float, T: float, r: