Debt and Equity as Derivatives

33 Pages Posted: 10 Dec 2007

See all articles by Henning J. Fock

Henning J. Fock

University of Augsburg - Faculty of Business and Economics

Andreas Rathgeber

University of Augsburg - Institute of Materials Resource Management

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

Fock, Henning J. and Rathgeber, Andreas, Debt and Equity as Derivatives (November 8, 2007). Available at SSRN: https://ssrn.com/abstract=1067701 or http://dx.doi.org/10.2139/ssrn.1067701

Henning J. Fock

University of Augsburg - Faculty of Business and Economics ( email )

Augsburg, 86135
Germany

Andreas Rathgeber (Contact Author)

University of Augsburg - Institute of Materials Resource Management ( email )

Augsburg, 86159
Germany

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