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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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Calypso Technology, Inc. is a cloud-enabled provider of cross-asset front-to-back solutions and managed services for financial markets with over 35,000 users in 60+ countries. Its award-winning software improves reliability, adaptability, and scalability across several verticals, including capital markets, investment management, central banking, clearing, treasury, liquidity, and collateral.

Calypso is pioneering innovative technologies (native cloud technology, AI, Big data) that reimagine capital markets.


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