Merton's model lives on: hedge funds have seized on bond/equity price disparities to make money. Claire Smith looks at trading strategies and finds herself revisiting Merton's landmark work of the 1970s. (Markets). Posted: May 04, 2008 06:30:11
The inter-relationship between the price of debt and equity was first explored in 1973 by Robert Merton. His model treats debt as analogous to a short put on the asset value of the company, while equity holders effectively own a long call option on the asset value of a company, with the strike
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