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Probability of Default - Merton Model

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Probability of Default - Merton Model

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  • September 2011
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Question 1
With the use of Merton Model, the probability of Default (PD) of each firm is summarized as follow:

Company Name| ASX Code| Probability of Default|
Adelaide Brighton Limited| ABC| 0%|
Buderim Ginger Limited| BUG| 26.079%|
FFI Holdings Limited| FFI| 0.056%|
McPherson’s Limited| MCP| 0.003%|
Reece Australia Limited| REH| 0%|
Vietnam Industrial Investments Limited| VII| 2.472%|

Question 2
Using 15 Sep 2008 as a cut-off point, the pre and post results with respect to the Global Financial Crisis (GFC) analysis of PDs for the above 6 firms are summarized as follow: | | Probability of Defaults|

Company Name| ASX Code| 7 years| Pre GFC| Post GFC|
Adelaide Brighton Limited| ABC| 0%| 0%| 0%|
Buderim Ginger Limited| BUG| 26.079%| 21.716%| 11.693%| FFI Holdings Limited| FFI| 0.056%| 0.695%| 0%|
McPherson’s Limited| MCP| 0.003%| 0.012%| 0.056%|
Reece Australia Limited| REH| 0%| 0%| 0%|
Vietnam Industrial Investments Limited| VII| 2.472%| 17.319%| 5.313%|

Adelaide Brighton Limited (ASX Code: ABC)
The result shows that the probability of defaults for ABC remains constant at 0% both before and after the GFC.

Buderim Ginger Limited (ASX Code: BUG)
Before the GFC, the probability of default for BUG is 21.716%. After the GFC, the probability of default has reduced to approximately 11.693%.

FFI Holdings Limited (ASX Code: FFI)
Before the GFC, the probability of default for FFI is 0.695%. After the GFC, the probability of default has further reduced and reached 0%.

McPherson’s Limited (ASX Code: MCP)
Before the GFC, the probability of default for MCP is 0.012%. After the GFC, the probability of default has increased slightly to 0.056% Reece Australia Limited (ASX Code: REH)
The result shows that the probability of defaults for REH remains constant at 0% both before and after the GFC.

Vietnam Industrial Investment Limited (ASX Code: VII)
Before the GFC, the...