In Order to Obtain the Probability of Default in the Merton

question 20

Multiple Choice

In order to obtain the probability of default in the Merton (1974) model under the real-world probability measure,we need to make the following change in calculating $N \left( d _ { 2 } \right)$ in the formula :

• A)Replace \(\mu\)
• (the firm's asset growth rate)with
• \(r\)
• (the risk-free rate).
• B)Replace \(r\)
• With
• \(\mu\)
• )
• C)Replace \(\sigma\)
• (the firm's asset volatility)with
• \(d _ { 1 } \sqrt { T - t }\)
• )
• D)Replace \(d _ { 2 }\)
• With
• \(\sigma \sqrt { T - t }\)
• )

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Definitions:

Price Ceiling

A government-imposed limit on the price charged for a product, intended to prevent the price from rising to a certain level.

Maximum Price

A price ceiling set by a government or regulatory body, above which a particular good or service cannot be sold.

Government

The governing body of a nation, state, or community which is responsible for making and enforcing laws and managing public resources and affairs.

Rationing Mechanism

a system or policy by which scarce goods or services are distributed.