A Game Theory Analysis of Options: Corporate Finance and Financial Intermediation in Continuous Time

Front Cover
Springer Science & Business Media, Mar 15, 2004 - Business & Economics - 176 pages
1 Review
Modern option pricing theory was developed in the late sixties and early seventies by F. Black, R. e. Merton and M. Scholes as an analytical tool for pricing and hedging option contracts and over-the-counter warrants. How ever, already in the seminal paper by Black and Scholes, the applicability of the model was regarded as much broader. In the second part of their paper, the authors demonstrated that a levered firm's equity can be regarded as an option on the value of the firm, and thus can be priced by option valuation techniques. A year later, Merton showed how the default risk structure of cor porate bonds can be determined by option pricing techniques. Option pricing models are now used to price virtually the full range of financial instruments and financial guarantees such as deposit insurance and collateral, and to quantify the associated risks. Over the years, option pricing has evolved from a set of specific models to a general analytical framework for analyzing the production process of financial contracts and their function in the financial intermediation process in a continuous time framework. However, very few attempts have been made in the literature to integrate game theory aspects, i. e. strategic financial decisions of the agents, into the continuous time framework. This is the unique contribution of the thesis of Dr. Alexandre Ziegler. Benefiting from the analytical tractability of contin uous time models and the closed form valuation models for derivatives, Dr.
 

What people are saying - Write a review

We haven't found any reviews in the usual places.

Contents

Methodological Issues
1
Backward Induction and Subgame Perfection
2
The General Contingent Claim Equation
5
14 The Method of Game Theory Analysis of Options
7
15 When is the Method Appropriate?
8
151 The Link Between Option Value and Expected Utility
9
16 What Kind of Problems is the Method Particularly Suited for?
10
Determining the Price of a Perpetual Put Option
11
383 The Effect of the Payout Rate on Equity Value
73
384 Effect of a Loan Covenant on the Optimal Payout Rate
74
39 Conclusion
75
Junior Debt
77
42 The Model
78
43 The Value of the Firm and its Securities
80
432 The Value of Junior Debt
82
433 The Value of the Firm
84

Valuing the Option for a Given Exercise Strategy
12
Solving the Game
13
174 The Solution
15
18 Outline of the Book
16
Credit and Collateral
19
22 The RiskShifting Problem
20
221 The Model
21
222 ProfitSharing Contracts Between Lender and Borrower
22
223 Developing an Incentive Contract
23
224 RenegotiationProof Incentive Contracts
26
225 The Feasible RenegotiationProof Incentive Contract
28
226 The Financing Decision
29
23 The Observability Problem
31
232 Collateral
32
24 Conclusion
36
Endogenous Bankruptcy and Capital Structure
39
32 The Model
41
33 The Value of the Firm and its Securities
43
332 The Value of the Firm
45
333 The Value of Equity
47
34 The Effect of Capital Structure on the Firms Bankruptcy Decision
48
342 The PrincipalAgent Problem of Endogenous Bankruptcy
49
343 Measuring the Agency Cost of Debt Arising from Endogenous Bankruptcy
52
35 The Investment Decision
53
352 RiskShifting
55
353 Measuring the Agency Cost of Debt Arising from RiskShifting
57
354 The Incentive Effects of Loan Covenants
58
36 The Financing Decision
59
362 Interest Payments vs Increase in the Face Value of Debt
62
363 Equilibrium on the Credit Market
64
364 Capital Structure and the Expected Life of Companies
66
37 An Incentive Contract
68
371 Impact of the Effective Interest Rate
69
372 Impact of the Rate of Growth in Debt
70
38 The Impact of Payouts
71
382 The Bankruptcy Decision
72
434 The Value of Equity
85
44 The Equity Holders Optimal Bankruptcy Choice
89
45 The Firms Decision to Issue Junior Debt
91
46 The Influence of Junior Debt on the Value of Senior Debt
96
462 On the Impossibility of Immunization Against Negative Wealth Effects
97
47 Conclusion
98
Bank Runs
101
52 The Model
102
53 The Depositors Run Decision
104
54 Valuing the Banks Equity
106
55 The Shareholders Recapitalization Decision
109
56 The Banks Investment Incentives when Bank Runs are Possible
111
57 The Banks Funding Decision
115
572 Optimal Bank Capital when Asset Risk is Positive
116
573 Optimal Bank Capital with Zero Asset Risk
120
59 Conclusion
121
Deposit Insurance
123
62 The Model
124
63 Valuing Deposit Insurance Bank Equity and Social Welfare
126
632 The Value of Bank Equity
127
633 The Value of Social Welfare
128
64 The Guarantors Liquidation Strategy and Social Welfare
129
642 Maximizing Social Welfare
130
65 The Incentive Effects of Deposit Insurance
133
652 The Financing Decision
136
66 The Impact of Deposit Insurance on the Equilibrium Deposit Spread
137
67 Deposit Insurance with Liquidation Delays
138
68 Deposit Insurance with Unobservable Asset Value
140
Extending the Model of Chapter 3
141
682 Mertons Solution
146
69 Conclusion
152
Summary and Conclusion
155
References
161
List of Figures
167
List of Symbols
169
Copyright

Other editions - View all

Common terms and phrases

Bibliographic information