IDEAS home Printed from https://ideas.repec.org/p/wbk/wbrwps/333.html
   My bibliography  Save this paper

An option - pricing approach to secondary market debt : applied to Mexico

Author

Listed:
  • Claessens, Stijn
  • van Wijnbergen, Sweder

Abstract

This paper presents a pricing model for secondary market debt designed to assess the market value of various forms of guarantees and the impact of debt reduction on the value of remaining claims. The model is more flexible and realistic than other models. The technique used, option pricing, accounts for the sources and nature of risks on sovereign debt. It is extremely flexible in handling different maturity schedules, differences in seniority, and expectations about the availability of foreign exchange and willingness to pay. The model is applied to Mexico. It first prices the value of a general obligation claim. It then prices claimss with fixed and rolling interest guarantees. It derives specific market values for general obligation debt and for collateralized exit bonds and schemes on the secondary market price. It then concludes that the terms of the new bonds are in accord with recent secondary market prices of the existing debt. Finally, the paper shows that the three debt restructuring options offered to individual banks are not equivalent if the newly created exit bonds are senior to new money claims. The new money option is worth considerably less.

Suggested Citation

  • Claessens, Stijn & van Wijnbergen, Sweder, 1990. "An option - pricing approach to secondary market debt : applied to Mexico," Policy Research Working Paper Series 333, The World Bank.
    • Handle: RePEc:wbk:wbrwps:333
    as

    Download full text from publisher

    File URL: http://www-wds.worldbank.org/external/default/WDSContentServer/WDSP/IB/1990/01/01/000009265_3960928155735/Rendered/PDF/multi0page.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Cohen, Daniel, 1993. "A valuation formula for LDC debt," Journal of International Economics, Elsevier, vol. 34(1-2), pages 167-180, February.
    2. 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.
    3. Margrabe, William, 1978. "The Value of an Option to Exchange One Asset for Another," Journal of Finance, American Finance Association, vol. 33(1), pages 177-186, March.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Claessens,Constantijn A. & Diwan, Ishac & Fernandez-, 1992. "Recent experience with commercial bank debt r eduction," Policy Research Working Paper Series 995, The World Bank.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. van Wijnbergen, Sweder, 1990. "Mexico's external debt restructuring in 1989-90," Policy Research Working Paper Series 424, The World Bank.
    2. Ammann, Manuel & Kind, Axel & Wilde, Christian, 2003. "Are convertible bonds underpriced? An analysis of the French market," Journal of Banking & Finance, Elsevier, vol. 27(4), pages 635-653, April.
    3. Jérôme Detemple, 1999. "American Options: Symmetry Properties," CIRANO Working Papers 99s-45, CIRANO.
    4. Bjork, Tomas, 2009. "Arbitrage Theory in Continuous Time," OUP Catalogue, Oxford University Press, edition 3, number 9780199574742.
    5. Radnai, Márton, 2005. "Indexált alaptermék árú opciók [Indexed options based on the underlying price]," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(2), pages 130-143.
    6. Lim, Terence & Lo, Andrew W. & Merton, Robert C. & Scholes, Myron S., 2006. "The Derivatives Sourcebook," Foundations and Trends(R) in Finance, now publishers, vol. 1(5–6), pages 365-572, April.
    7. Dominique Guegan & Jing Zhang, 2009. "Pricing bivariate option under GARCH-GH model with dynamic copula: application for Chinese market," PSE-Ecole d'économie de Paris (Postprint) halshs-00368336, HAL.
    8. Dominique Guegan & Jing Zang, 2009. "Pricing bivariate option under GARCH-GH model with dynamic copula: application for Chinese market," The European Journal of Finance, Taylor & Francis Journals, vol. 15(7-8), pages 777-795.
    9. Luiz Vitiello & Ivonia Rebelo, 2015. "A note on the pricing of multivariate contingent claims under a transformed-gamma distribution," Review of Derivatives Research, Springer, vol. 18(3), pages 291-300, October.
    10. Asbjørn T. Hansen & Peter Løchte Jørgensen, 2000. "Analytical Valuation of American-Style Asian Options," Management Science, INFORMS, vol. 46(8), pages 1116-1136, August.
    11. François-Heude, Alain & Yousfi, Ouidad, 2013. "On the liquidity of CAC 40 index options Market," MPRA Paper 47921, University Library of Munich, Germany, revised 01 Jul 2013.
    12. Konstantinos Konstantaras & Vasilios Sogiakas, 2019. "Is stock liquidity transferred and upgraded in acquisitions? Evidence from liquidity synergies in US freeze-outs," Annals of Operations Research, Springer, vol. 282(1), pages 179-216, November.
    13. Geonwoo Kim, 2020. "Valuation of Exchange Option with Credit Risk in a Hybrid Model," Mathematics, MDPI, vol. 8(11), pages 1-11, November.
    14. Jonathan Ingersoll, 2002. "The Subjective and Objective Evaluation of Incentive Stock Options," Yale School of Management Working Papers ysm276, Yale School of Management, revised 01 Jul 2003.
    15. Matteo Gardini & Piergiacomo Sabino & Emanuela Sasso, 2020. "Correlating L\'evy processes with Self-Decomposability: Applications to Energy Markets," Papers 2004.04048, arXiv.org, revised Jul 2020.
    16. Marcel Philipp Müller & Sebastian Stöckl & Steffen Zimmermann & Bernd Heinrich, 2016. "Decision Support for IT Investment Projects," Business & Information Systems Engineering: The International Journal of WIRTSCHAFTSINFORMATIK, Springer;Gesellschaft für Informatik e.V. (GI), vol. 58(6), pages 381-396, December.
    17. Hamoto, Azad & Correia, Ricardo, 2012. "A theoretical analysis of the stages and events experienced by financially distressed firms," DEE - Working Papers. Business Economics. WB 13115, Universidad Carlos III de Madrid. Departamento de Economía de la Empresa.
    18. P. Pellizzari, 1998. "Efficient Monte Carlo Pricing of Basket Options," Finance 9801001, University Library of Munich, Germany.
    19. Jing Zhang & Dominique Guegan, 2008. "Pricing bivariate option under GARCH processes with time-varying copula," PSE-Ecole d'économie de Paris (Postprint) halshs-00286054, HAL.
    20. Nordahl, Helge A., 2008. "Valuation of life insurance surrender and exchange options," Insurance: Mathematics and Economics, Elsevier, vol. 42(3), pages 909-919, June.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:wbk:wbrwps:333. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Roula I. Yazigi (email available below). General contact details of provider: https://edirc.repec.org/data/dvewbus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.