White Paper - Capital Structure Arbitrage under a Risk-Neutral Calibration

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Published in the Journal of Risk and Financial Management by Calypso Solution Architect Dr. Peter Zeitsch, this paper proposes a new Merton model calibration that employs deep out-of-the-money equity put volatilities and a simple technique for risk neutrally deriving the default barrier. This has important implications for measuring counterparty credit risk and leads to a new approach to trade equity against credit. The strategy is fully back tested in Calypso.


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