Public Finance

Professor Alexandre Ziegler (auth.)'s A Game Theory Analysis of Options: Corporate Finance and PDF

By Professor Alexandre Ziegler (auth.)

ISBN-10: 3540246908

ISBN-13: 9783540246909

ISBN-10: 3642058469

ISBN-13: 9783642058462

Modern choice pricing idea was once constructed within the past due sixties and early seventies through 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 proven levered firm's fairness could be considered as an choice at the worth of the company, and therefore could be priced through alternative valuation recommendations. A 12 months later, Merton confirmed how the default possibility constitution of cor­ porate bonds might be decided via alternative pricing concepts. choice pricing versions are actually used to cost almost the entire variety of monetary tools and fiscal promises reminiscent of deposit coverage and collateral, and to quantify the linked dangers. through the years, choice pricing has advanced from a collection of particular types to a normal analytical framework for examining the creation 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 conception points, i. e. strategic monetary judgements of the brokers, into the continual time framework. this can be the original contribution of the thesis of Dr. Alexandre Ziegler. making the most of the analytical tractability of contin­ uous time versions and the closed shape valuation versions for derivatives, Dr.

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Throughout, it is assumed that r* < r, where r denotes the risk-free interest rate. The case r* < 0 corresponds to a sinking fund provision. lfbankruptcy occurs, a fraction 0 ~ a < 1 of the firm's asset value is lost, leaving debt holders with (1 - a)SB, where SB denotes the asset value at which bankruptcy occurs. 3 The structure of the game between lender and borrower is summarized in Fig. 1. In the first phase, the financing decision is made. The amount O 1 2 3 As noted by Black and Cox [9), many bonds have contractual provisions which limit the extent to which the firm can seil assets to meet interest payments.

3 The Value of the Firm and its Securities Once the game has been specified, the next step is to value the players' payoffs using option pricing theory, treating all the players' decision variables as parameters. This constitutes the object of this section. In Sect. 4, we will then begin the analysis oft he players' optimal strategies with the last decision to be made, namely, equity holders' bankruptcy decision. -L and a are known to the lender. Since asset sales are prohibited, any net cash outfiows associated with interest payments must be financed by selling additional equity.

6 ~i. 5 : ,, <: :E " U> . 3. I I I \ "'... , ... ,, " 10 " , , ... No Collateral Collateral 50% Collateral 90% Full Collateralization 20 ... '-. 30 -'- "-'-'- 40 50 60 Project Value S 70 80 90 100 Fig. 8. 05, a = T = 1. As the amount of collateral is increased, the risk-shifting incentive rises for low project values and falls for high project values. In the limiting case of full collateralization, the riskshifting incentive disappears completely. 1. First, collateral grants the lender a claim on an additional asset in the case of bankruptcy, thus allowing hirn to recover more wealth.

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A Game Theory Analysis of Options: Corporate Finance and Financial Intermediation in Continuous Time by Professor Alexandre Ziegler (auth.)


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