FRM: Expected default frequency (EDF, PD) with Merton Model

A visual and Excel-based review of the Merton model used to estimate EDF (or probability of default). This is a structural approach; i.e,. default is predicted by the firm's balance sheet properties. For more financial risk videos, visit our website! www.bionicturtl...

[@Unused50]

David I can't thank you enough for clarifying the concepts so easily :)

[@atconnects-faisy]

I have never seen this simple explanation of Merton's model. Please let me know if you have a tutorial on KMV model as well. Big thanks to you!

[@utkarshshrivastava8411]

KMV is similar to this merton model only

[@ronaldrajeh9808]

Thanks for the video. Do you have any videos on how Moody's KMV does their calculation and how it compares to Bloomberg DRSK. I know that both use the Merton Model but their result of probability can be significant sometimes.

[@shantanushit8963]

is tht 1184 a random value which we estimated it will be at that point?

[@777law7]

You are the best, David! You just saved my tomorrow! Yippee!

[@sundeepbhat7]

very lucid. thanks!

[@marcoschaerli7100]

I think I understand the model and I get all the right numbers...except, the last, wenn i put in excel norm.s.vert(-2.78; falsch) I get 0.0099168 ... can someone help me what i did wrong?

[@andraro87]

hey david,
I am writing because I have a fundamental question to ask. You assume that the assets are 1000 (so E+D), but in reality we only equity (share price x shares) and book liabilities. I wanted to know if maybe you can make a tutorial on how to apply option-pricing model (BS) to find the assets value and the standard deviation of the assets i am having problems doing this in excel

[@sourajitaiyer]

very useful

[@zero_sugar_]

why is it half of the long term liability only?

[@nachi707]

Very good and informative video! Thanks

[@dosmukhamedshatemir934]

how he get the Default Point 600?

[@farleonhart]

great video! thank you for the clear explanation abt this model. ive been looking for something like for quite some time. +1

[@SteveHovland]

You are not using the terminology commonly used in banking- PD, LGD, EAD.

[@DChan-hi2ei]

am I crazy? but the formula showed (mean-sigma/2) but when he talked about it via the calculation he said it was the (mean - variance/2)
so is it the variance? or the sigma (std dev) as he divided by sigma*T.. and didnt have variance*T) maybe the sigma with a 2 in the bottom means sigma^2?

[@cruelpirate78]

formula is asset growth or drift minus 1/2 times volatility squared. since vol sq is variance you can write is as:
mu - (.5)(variance)
this is the added cushion with passage of time.

[@bentyler8449]

You are not crazy. I think the mistake on the formula is where he has 2 on the denote rather than the exponent

[@RockBunnyBG]

In the numerator, you have the variance (SD^2), while in the denominator you have just SD. I guess he forgot to put the 2 as a power rather than a signifier at the bottom.

[@sitemp1]

How was 1184 calculated? Thanks in advance!

[@Shivangi230289]

exp(mu- variance*.5) ... the term in bracket is the added cushion with time and exponential of bracket will give the value after growth

[@kvastie]

I love you. Thaaaaaaanks a lot!

[@zes3813]

no scuh thing as riskx or nto, doesn tmatter

[@prafulmaka6151]

How do you say 1000/600 is 51% ?!

[@마요마요-i3d]

you have to remember Ln.

[@elhallgass]

Thanks a lot!!

[@jpcardenas90]

Gracias!!!!

[@bionicturtle]

You're welcome! Thank you for watching :)

[@stevendohse]

fantastic as usual. any equation i need conceptualising = youtube David Harper

[@delins1234456]

u rock 谢谢

[@md.ayaan.sheikh]

IIMB!!!!