Debt and Equity as Derivatives
33 Pages Posted: 10 Dec 2007
Date Written: November 8, 2007
Abstract
A structural form asset value model is developed from which the equivalent martingale measure can be computed. This measure is later applied to price different claims on the company's asset value like its shares, bonds, credit default options, and stock options. Thereafter, a reduced form model is introduced that has no asset value model, although the claims on debt capital and the default probabilities can be computed from the market prices. Shares, bonds, and a credit default option are valued with this model. In the last section, a call is priced with the structural model and the results are compared to a pricing with the standard binomial model.
JEL Classification: G13
Suggested Citation: Suggested Citation
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