A default risk is the risk that a person or an organization will fail to make a payment that they have promised. There are many models that help us to analyze credit risk, such as Default Probability, Loss Given Default, and Migration Risk. All these models are important for evaluating credit risk, but the most important factor is the Probability of Default that is mentioned in this paper. This paper uses the Black Scholes formula for European call option to find the probability default of a firm. How d_2 in Black schools model became the probability default of a Merton model. Merton model is the structural model because it is using firm's value to inform the probability of firms default and here we are going to show the relationship between Black Scholes European call option and the probability of default of a firm. The main aim of this paper is to describe the factor that affects the default probability default using Black Scholes model for European Call option by the help of some examples.
展开▼
