Under the contingent claims approach, credit risk is evaluated as the value of the put on the firm's assets with a strike price equal to the face value of the debt and maturity equal to the maturity of the obligation. The Black Scholes model can then be used to value the put, and therefore an increase in volatility and the time to expiry (ie maturity) will increase the value of the debt. An increase in the risk free rate will actually reduce the value of the put, therefore statements I and III are correct and Choice 'b' is the correct answer.
Contribute your Thoughts:
Chosen Answer:
This is a voting comment (?). You can switch to a simple comment. It is better to Upvote an existing comment if you don't have anything to add.
Submit