By Professor Alexandre Ziegler (auth.)
Modern choice pricing idea used to be constructed within the past due sixties and early seventies by means of F. Black, R. e. Merton and M. Scholes as an analytical instrument for pricing and hedging choice contracts and over the counter warrants. How ever, already within the seminal paper by means of Black and Scholes, the applicability of the version used to be considered as a lot broader. within the moment a part of their paper, the authors verified levered firm's fairness may be considered as an alternative at the worth of the company, and therefore might be priced by way of alternative valuation concepts. A 12 months later, Merton confirmed how the default danger constitution of cor porate bonds will be made up our minds through alternative pricing concepts. choice pricing versions are actually used to cost almost the whole variety of monetary tools and fiscal promises resembling deposit assurance and collateral, and to quantify the linked hazards. through the years, alternative pricing has advanced from a suite of particular versions to a basic analytical framework for interpreting the construction strategy of monetary contracts and their functionality within the monetary intermediation technique in a continuing time framework. although, only a few makes an attempt were made within the literature to combine video game concept elements, i. e. strategic monetary judgements of the brokers, into the continual time framework. this is often the original contribution of the thesis of Dr. Alexandre Ziegler. taking advantage of the analytical tractability of contin uous time types and the closed shape valuation versions for derivatives, Dr.
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Extra resources for A Game Theory Analysis of Options: Corporate Finance and Financial Intermediation in Continuous Time
Once its financing is completed, the firm chooses its investment program. We shall be concerned with two issues: underinvestment and the firm's choice of the risk of its assets, a. Finally, equity holders choose their bankruptcy strategy SB. If the firm goes bankrupt, its assets are liquidated and payoffs are realized, with debt holders receiving (l-a)SB and equity holders nothing. Financing Decision Interest Rates r* and c/J Face Amount of Debt Da Investment Decision Underinvestment Asset Risk a Bankruptcy Decision and Payoffs Bankruptcy-Triggering Asset Value SB Fig.
To see this, assurne that the lender would be entitled to choose the bankruptcy-triggering asset value SB.
In doing so, the different incentive effects of these two components of debt service and their role for credit market equilibrium can be analyzed. Second, the analysis below discusses endogenous bankruptcy as a principal-agent problem and quantifies the agency cost of debt arising from equity holders' socially sub optimal bankruptcy strategy. Third, stressing the game theory perspective of this book and furt hering the analysis of Chap. 2, the effect of loan covenants and of the lender's information ab out asset value on equity holders' risk-taking incentives is presented.
A Game Theory Analysis of Options: Corporate Finance and Financial Intermediation in Continuous Time by Professor Alexandre Ziegler (auth.)