A model of credit risk based on cash flow
An extension of the structural Mertons model of risk of default is proposed. It is based on an analysis of possible sources of liquidity problems leading to bankruptcy. Pricing of a debt subject to default risk requires finding a value of an American put option, which is performed by a Monte-Carlo simulation of a discretisation of the underlying stochastic equations. This also allows an estimation of the probability of default.
credit risk structural model