22. Question
A portfolio manager at a hedge fund is applying the Merton model to estimate the volatility of a non-dividend-paying firm whose equity shares are held in the fund’s portfolio. The manager conducts preliminary analysis on the firm and obtains the following results:
- Value of equity: USD 45 million
- Value of the firm’s only debt maturing in 5 years: USD 60 million
- d₁: 3.217790
- d₂: 3.038905
Assuming a constant volatility of firm value, what is the estimate of that volatility? | Financial Risk Manager Part 2 Quiz - LeetQuiz
Financial Risk Manager Part 2
Explanation:
In the Merton model, the parameters d1 and d2 are related by the formula:
d2=d1−σVT
Where:
d1=3.217790
d2=3.038905
T=5 years
σV is the firm value volatility.
Rearranging the formula to solve for σV:
σV=Td1−d2σV=53.217790−3.038905σV=2.2360680.178885≈0.08
The estimate of the firm value's constant volatility is 8%.
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Question
A portfolio manager at a hedge fund is applying the Merton model to estimate the volatility of a non-dividend-paying firm whose equity shares are held in the fund’s portfolio. The manager conducts preliminary analysis on the firm and obtains the following results:
Value of equity: USD 45 million
Value of the firm’s only debt maturing in 5 years: USD 60 million
d₁: 3.217790
d₂: 3.038905
Assuming a constant volatility of firm value, what is the estimate of that volatility?
