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Evaluation of equity-based debt obligations

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  • Alexander Fromm

Abstract

We consider a class of participation rights, i.e. obligations issued by a company to investors who are interested in performance-based compensation. Albeit having desirable economic properties equity-based debt obligations (EbDO) pose challenges in accounting and contract pricing. We formulate and solve the associated mathematical problem in a discrete time, as well as a continuous time setting. In the latter case the problem is reduced to a forward-backward stochastic differential equation (FBSDE) and solved using the method of decoupling fields.

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  • Alexander Fromm, 2019. "Evaluation of equity-based debt obligations," Papers 1901.02254, arXiv.org.
    • Handle: RePEc:arx:papers:1901.02254
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    References listed on IDEAS

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    1. Ma, Jin & Yin, Hong & Zhang, Jianfeng, 2012. "On non-Markovian forward–backward SDEs and backward stochastic PDEs," Stochastic Processes and their Applications, Elsevier, vol. 122(12), pages 3980-4004.
    2. Delarue, François, 2002. "On the existence and uniqueness of solutions to FBSDEs in a non-degenerate case," Stochastic Processes and their Applications, Elsevier, vol. 99(2), pages 209-286, June.
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