A credit model that treats equity as an option on the firm's assets and default as assets falling below debt. It links default to asset value and volatility.
Where you will meet it
Structural model comes up in 4 learning outcome notes across the FRM syllabus.
A few of them:
Estimating Default Probabilities FRM Part II · Credit risk measurement and management
“In the Merton model the two differ only in the asset drift.”
Estimating Default Probabilities FRM Part II · Credit risk measurement and management
“The Merton model treats a firm's assets as following geometric Brownian motion, with debt as a single zero-coupon claim of face value D maturing at T.”
Estimating Default Probabilities FRM Part II · Credit risk measurement and management
“In the Merton model default happens only at maturity, when the asset value falls below the face value of the debt.”
Estimating Default Probabilities FRM Part II · Credit risk measurement and management
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