• Equity Derivatives

    An introduction to structural credit-equity models

    This article aims to give an introduction to the concept of structural credit-equity models, where both debt and equity products are treated as derivatives on the underlying firm value. These models allow for the valuation of credit and equity instruments in a unified framework. Moreover, when taxes and bankruptcy costs are incorporated, they can be used to identify a firm’s optimal capital structure. Starting with the first structural model introduced by Merton (1974), several diffusion-based models that extend the concept to a more realistic framework are surveyed.