FIGURE17.3EquityValueandStandardDeviationinFirm
Value
Probability of Default and Default Spreads
Oneofthemoreinterestingpiecesofoutputfromtheoption
pricingmodelistherisk-neutralprobabilityofdefaultthatwe
canobtainforthefirm.IntheBlack-Scholesmodel,wecan
estimate this value from N(d 2 ), which is the risk-neutral
probabilitythatS>K,whichinthismodelistheprobability
thatthevalueofthefirm’sassetswillexceedthefacevalueof
thedebt.Currently,[1−N(d 2 )] shouldyieldarisk-neutral
probability of defaulting on the debt.