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

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By Professor Alexandre Ziegler (auth.)

Modern choice pricing concept was once constructed within the past due sixties and early seventies by means of F. Black, R. e. Merton and M. Scholes as an analytical device for pricing and hedging alternative contracts and over the counter warrants. How­ ever, already within the seminal paper through Black and Scholes, the applicability of the version was once considered as a lot broader. within the moment a part of their paper, the authors established levered firm's fairness could be considered as an choice at the price of the company, and therefore might be priced through choice valuation recommendations. A 12 months later, Merton confirmed how the default probability constitution of cor­ porate bonds may be made up our minds via alternative pricing concepts. alternative pricing types at the moment are used to cost almost the entire diversity of monetary tools and fiscal promises equivalent to deposit coverage 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 studying the construction technique of monetary contracts and their functionality within the monetary intermediation technique in a continual time framework. despite the fact that, only a few makes an attempt were made within the literature to combine video game concept facets, 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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Extra info for A Game Theory Analysis of Options: Corporate Finance and Financial Intermediation in Continuous Time

Example text

2 The Principal-Agent Problem of Endogenous Bankruptcy The simple model presented above can be used to analyze the principal-agent problem of endogenous bankruptcy in loan contracts in a very general way. The incentive problem sterns from the fact that borrower and lender do not agree on the appropriate asset value which is to trigger bankruptcy. To see this, assurne that the lender would be entitled to choose the bankruptcy-triggering asset value SB.

27) where 1 is the indicator function. This payoff structure is illustrated in Fig. 6. The payoff to the borrower equals total asset value including collateral, X + S, minus what is paid to the lender (min [X + S, D], since the lender bears the verification cost). 28) This payoff structure is the same as that of a call option on an underlying asset S with an exercise price of D - X, as demonstrated in Fig. 7. 30) If the value of the collateral at the end of the period is random and lognormally distributed, an analysis similar to the one presented here can be conducted using the Margrabe [57] model instead of the Black-Scholes [10] model to value the lender and the borrower's payoffs.

To be feasible, the contract must call for a fixed payment D of zero. To see this, assume first that D were chosen to be positive. Then, the borrower would be unable to fulfill his contractual obligation whenever 8 < D + ß8, Le. whenever 8 < D/(l - ß). This would make his effective payoff a convex function of the project's terminal value 8 and create a risk-shifting problem. Similarly, if D were chosen to be negative, the borrower's payoff would become concave, and a risk-shifting problem would arise as weIl.

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