By Professor Alexandre Ziegler (auth.)
Modern choice pricing idea was once built within the past due sixties and early seventies by means of F. Black, R. e. Merton and M. Scholes as an analytical software for pricing and hedging choice contracts and over the counter warrants. How ever, already within the seminal paper by way of Black and Scholes, the applicability of the version used to be considered as a lot broader. within the moment a part of their paper, the authors confirmed levered firm's fairness will be considered as an alternative at the worth of the enterprise, and hence should be priced by means of choice valuation concepts. A yr later, Merton confirmed how the default danger constitution of cor porate bonds could be made up our minds via choice pricing concepts. alternative pricing types at the moment are used to cost almost the total variety of economic tools and fiscal promises equivalent to deposit coverage and collateral, and to quantify the linked hazards. through the years, choice pricing has advanced from a collection of particular types to a normal analytical framework for interpreting the creation technique of monetary contracts and their functionality within the monetary intermediation procedure in a continual time framework. although, only a few makes an attempt were made within the literature to combine video game concept features, i. e. strategic monetary judgements of the brokers, into the continual time framework. this is often the original contribution of the thesis of Dr. Alexandre Ziegler. taking advantage of the analytical tractability of contin uous time versions and the closed shape valuation types for derivatives, Dr.
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Additional info for A Game Theory Analysis of Options: Corporate Finance and Financial Intermediation in Continuous Time
Under the incentive contract derived above, the agent has a strong incentive to understate the true success of the project, since he has to pay less to the principal as a result of this misinformation. To see this, assurne both parties have agreed to the above contract, calling for the agent to pay a share ß of the gross return of the project to the principal. Clearly, if the principal cannot verify the true return of the project, the agent will save ß currency units for each currency unit he understates the project's terminal value.
Morellee  analyzes the consequence of such provisions for firms' optimal leverage and credit spreads on corporate debt. To protect the value of their claim, the bondholders must require that the securities issued to finance these payments be equity or subordinated (junior) bonds (see Black and Cox ). Restrictions on the issue of additional debt are often observed in practice. S. Securities and Exchange Commission between January 1974 and December 1975, more than 90 percent of the bonds contained such restrictions.
The impact of the amount of collateral on the borrower's risk-shifting incentives is analyzed and it is shown that in the limiting case of full loan collateralization, the risk-shifting incentive can be eliminated completely. Finally, Sect. 4 concludes the chapter and discusses a few practical consequences for firm financing of the general result that there exists no contract solving both the risk-shifting and the observability problem simultaneously. 2 The Risk-Shifting Problem A classical problem in financial contracting is the so-called risk-shifting problem.