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Stock Options as Barrier Contingent Claims

  • Ericsson, Jan

    ()

    (McGill University)

  • Reneby, Joel

    ()

    (Dept. of Finance, Stockholm School of Economics)

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.

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File URL: http://swopec.hhs.se/hastef/papers/hastef0137.pdf
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Paper provided by Stockholm School of Economics in its series SSE/EFI Working Paper Series in Economics and Finance with number 137.

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Length: 38 pages
Date of creation: Nov 1996
Date of revision: 01 Feb 2002
Publication status: Published in Applied Mathematical Finance, 2003, pages 121-147.
Handle: RePEc:hhs:hastef:0137
Contact details of provider: Postal: The Economic Research Institute, Stockholm School of Economics, P.O. Box 6501, 113 83 Stockholm, Sweden
Phone: +46-(0)8-736 90 00
Fax: +46-(0)8-31 01 57
Web page: http://www.hhs.se/
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  1. Mark Rubinstein., 1994. "Implied Binomial Trees," Research Program in Finance Working Papers RPF-232, University of California at Berkeley.
  2. Hayne E. Leland and Klaus Bjerre Toft., 1995. "Optimal Capital Structure, Endogenous Bankruptcy, and the Term Structure of Credit Spreads," Research Program in Finance Working Papers RPF-259, University of California at Berkeley.
  3. 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.
  4. P. Carr, 1995. "Two extensions to barrier option valuation," Applied Mathematical Finance, Taylor & Francis Journals, vol. 2(3), pages 173-209.
  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 351-67, May.
  6. Geske, Robert, 1979. "The valuation of compound options," Journal of Financial Economics, Elsevier, vol. 7(1), pages 63-81, March.
  7. 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.
  8. 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 637-54, May-June.
  9. Rubinstein, Mark, 1994. " Implied Binomial Trees," Journal of Finance, American Finance Association, vol. 49(3), pages 771-818, July.
  10. Ericsson, Jan & Reneby, Joel, 1995. "A Framework for Valuing Corporate Securities," SSE/EFI Working Paper Series in Economics and Finance 89, Stockholm School of Economics, revised Oct 1998.
  11. Toft, Klaus Bjerre & Prucyk, Brian, 1997. " Options on Leveraged Equity: Theory and Empirical Tests," Journal of Finance, American Finance Association, vol. 52(3), pages 1151-80, July.
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