Analytic Solution to the Two Dimension Merton Model
12 Pages Posted: 12 Jul 2016 Last revised: 22 Jul 2016
Date Written: July 11, 2016
We present an exact analytic solution to the two-dimensional correlated default structural Merton model in the form of a local volatility problem using a conformal square-root transformation of the exact solution to a 2D hybrid barrier problem. We also give an approximation and evaluate it numerically to give an example. Finally we give an exact simpler solution for the zero correlation case.
Keywords: Merton, two dimensional, local volatility, hybrid barrier, approximation, correlated default, structural, conformal
JEL Classification: C1, C14, C22, C63, E44, F65, G1, Y1
Suggested Citation: Suggested Citation