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You are applying the standard Merton model to the following data : Today's asset value: 1000 Asset growth rate : 0.1 Asset volatility : 0.25

You are applying the standard Merton model to the following data:

Today's asset value: 1000

Asset growth rate : 0.1

Asset volatility : 0.25

Liabilities: 600

Maturity: 1 year

(i) Determine the default probability

(ii) Determine the asset volatility that would lead to a default probability of 5% (keep the values of the other variables constant).

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