Structural Models: What to know

In reading 38, LOS D, we are given an intimidating Black Scholes model to price company debt based on an option analogy. However, the LOS says “Explain” not “Calculate”. So does this mean we can just understand the intuition of of what is happening and be fine or do we need to memorize this formula?


well I think its more important to know the implications of the model, which will be a lot easier to remember if you can remember the actual formula- if you know that you can picture in your head how different assumptions of volatility, time, etc effect the d1 and d2 values. The formula can be memorized with repetition over a few days.

I think you are correct. I got 95% on the end of Chapter Questions for that reading without memorizing the formulas so I don’t think it is necessary. Most of the questions were regarding the assumptions of the models not the actual equations

^ There are EOC questions for derivatives? That’s news to me.

Its for the Fixed Income Reading in which Black Scholes is applied to risky debt securities