Solving Merton Equations

Thesee · August 2nd, 2005, 1:49 am

Dear all,I encounter a problem of solving two equations in Merton model (Please find the attachment for the detail). Could you please kindly give me some hints? Thanks so much for your help.

gigi · August 2nd, 2005, 3:01 pm

Knowing E and sigmaE, you can calculate the V and sigmaV numerically, which can be done in Excel by Solver. Rearrange the two equations to the form as f(x,y) = 0, g(x,y) = 0. Set the target as Minimise f(x,y)^2+ g(x,y)^2 by changing the values of x and y.

Thesee · August 5th, 2005, 12:42 am

Thanks so much for your hints. If I want to write this function as a VBA code, do you know how? Thanks.

mrmelchi · August 11th, 2005, 2:54 pm

I think this Excel file will be useful for you. I hope it helps.

Thesee · August 30th, 2005, 1:56 am

Thanks so much! I am really appreciated!!

azriebam · June 26th, 2007, 6:34 am

Dear Mr Melchi and Thesee,Could you re-attach the kmv model.zip file. I have trouble downloading it. Thanks.

rcohen · June 26th, 2007, 8:51 am

QuoteOriginally posted by: mrmelchiI think this Excel file will be useful for you. I hope it helps.mrmelchi,I like the spreadsheet - it is simple and straightforward. My only problem with it, however, is it's practicality. For instance, if you change the debt volatility slightly from what you currently have as 9.61917917181445% to 9%, the rating rises 3 notches to BBB and if you change it to 8%, it jumps a further 6 notches to AA! I can go on, but you get the message.This sort of sensitivity, especially to a parameter such as volatility, which is so difficult to get a definitive grip on, doesn't make it very practical, does it? I know you can argue that this is due to the ratings table and/or a calibration issue, but, still, this type of sensitivity will hold more or less.

ruchit · June 27th, 2007, 7:59 am

Dear Mr Melchi and Thesee,Thanks a ton for the excel sheets. really easy to understand.

mrmelchi · June 27th, 2007, 1:33 pm

I reload the KMV zip file. I hope this helps.

mrmelchi · June 27th, 2007, 6:11 pm

Dear rcohen,I think that you refer to asset volatility. For most public firms the price of equity, historical and implicit equity volatility are directly observable. Asset volatility is not observable. It is obtained by using BSM model. If you change Asset volatility to 9%, it will not fit to equity volatility observaded equal to 40% in the example.I hope this helps.

azriebam · June 28th, 2007, 12:43 am

Thanks Mr Melchi. It helps. Appreciate your assistance.

ExSan · July 4th, 2007, 8:38 pm

Solving Merton Equations "...All values are known, except V and sigma_v ...From the download-able file extract executable EXSAN to your desktop. The very first time EXSAN is executed it will create the default input/output directory c:\exsanIn order to access this directory START / RUN and type in c:\exsan