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Using Option Theory to Estimate Default Probabilities of Brazilian Companies
Código: WPE – 059
Andrea Maria Accioly F. Minardi
The equity market value can be seen as a call option on the firm’s asset. The exercise price is the debt face value. We built a sample composed by the most traded stocks of Brazilian companies rated by Moody’s or Standard& Poor’s and estimated for each stock the default probability reflected on price using the Option Theory Model. We compared the estimated probability with the historical mortality rate published by Moody’s and assigned each company a credit rating. We than compared the assigned rating to the agencies’ domestic rating and concluded that in general both ratings are in accordance.