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Stock Options as Barrier Contingent Claims

Author

Listed:
  • Ericsson, Jan

    (McGill University)

  • Reneby, Joel

    (Dept. of Finance, Stockholm School of Economics)

Abstract

This paper contributes in two ways. First it extends the Geske (1979) compound option pricing model to the case where the underlying call is a down-and-out claim. Second it provides an internally consistent frame-work for valuing options on general corporate securities. Numerical results suggest that the detailed characteristics of the underlying capital structure (such as coupons, principal and maturities) may substantially influence the pricing of options.

Suggested Citation

  • Ericsson, Jan & Reneby, Joel, 1996. "Stock Options as Barrier Contingent Claims," SSE/EFI Working Paper Series in Economics and Finance 137, Stockholm School of Economics, revised Sep 2002.
    • Handle: RePEc:hhs:hastef:0137
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    References listed on IDEAS

    as
    1. Rubinstein, Mark, 1994. "Implied Binomial Trees," Journal of Finance, American Finance Association, vol. 49(3), pages 771-818, July.
    2. Geske, Robert, 1979. "The valuation of compound options," Journal of Financial Economics, Elsevier, vol. 7(1), pages 63-81, March.
    3. Leland, Hayne E & Toft, Klaus Bjerre, 1996. "Optimal Capital Structure, Endogenous Bankruptcy, and the Term Structure of Credit Spreads," Journal of Finance, American Finance Association, vol. 51(3), pages 987-1019, July.
    4. Mark Rubinstein., 1994. "Implied Binomial Trees," Research Program in Finance Working Papers RPF-232, University of California at Berkeley.
    5. Black, Fischer & Cox, John C, 1976. "Valuing Corporate Securities: Some Effects of Bond Indenture Provisions," Journal of Finance, American Finance Association, vol. 31(2), pages 351-367, May.
    6. P. Carr, 1995. "Two extensions to barrier option valuation," Applied Mathematical Finance, Taylor & Francis Journals, vol. 2(3), pages 173-209.
    7. Toft, Klaus Bjerre & Prucyk, Brian, 1997. "Options on Leveraged Equity: Theory and Empirical Tests," Journal of Finance, American Finance Association, vol. 52(3), pages 1151-1180, July.
    8. Longstaff, Francis A & Schwartz, Eduardo S, 1995. "A Simple Approach to Valuing Risky Fixed and Floating Rate Debt," Journal of Finance, American Finance Association, vol. 50(3), pages 789-819, July.
    9. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-654, May-June.
    10. Jan Ericsson & Joel Reneby, 1998. "A framework for valuing corporate securities," Applied Mathematical Finance, Taylor & Francis Journals, vol. 5(3-4), pages 143-163.
    11. Gregory R. Duffee, 1998. "The Relation Between Treasury Yields and Corporate Bond Yield Spreads," Journal of Finance, American Finance Association, vol. 53(6), pages 2225-2241, December.
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    Citations

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    Cited by:

    1. Reindl, Johann & Stoughton, Neal & Zechner, Josef, 2013. "Market implied costs of bankruptcy," CFS Working Paper Series 2013/27, Center for Financial Studies (CFS).
    2. Marco Realdon, "undated". "Valuation of Put Options on Leveraged Equity," Discussion Papers 03/19, Department of Economics, University of York.
    3. Michele Bufalo & Antonio Di Bari & Giovanni Villani, 2022. "Multi-stage real option evaluation with double barrier under stochastic volatility and interest rate," Annals of Finance, Springer, vol. 18(2), pages 247-266, June.
    4. Maria Carmen Badia Batlle & M. Mercedes Galisteo Rodriguez & M. Teresa Preixens Benedicto, 2006. "Un modelo de riesgo de credito basado en opciones compuestas con barrera. Aplicacion al mercado continuo espanol," Working Papers in Economics 156, Universitat de Barcelona. Espai de Recerca en Economia.
    5. Rossella Agliardi, 2011. "A comprehensive structural model for defaultable fixed-income bonds," Quantitative Finance, Taylor & Francis Journals, vol. 11(5), pages 749-762.
    6. Hanke, Michael, 2005. "Pricing options on leveraged equity with default risk and exponentially increasing, finite maturity debt," Journal of Economic Dynamics and Control, Elsevier, vol. 29(3), pages 389-421, March.

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    More about this item

    Keywords

    Compound barrier contingent claims; option pricing;

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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