Bargaining in Standing Committees with an Endogenous Default: Figure 1

We derive analytical formulas for European call and put options on underlying assets that are exposed to double defaults risks which include exogenous counterparty default risk and endogenous default risk. The endogenous default risk leads the asset price to drop to zero and the exogenous counterparty default risk induces a drop in the asset price, but the asset can still be traded after this default time. A novel technique is developed to evaluate the European call and put options by first conditioning on the predefault and the postdefault time and then obtaining the unconditional analytic formulas for their price. We also compare the pricing results of our model with default-free option model and counterparty default risk option model.

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European Puts, Credit Protection, and Endogenous Default

Quarterly Journal of Finance ◽

10.1142/s2010139221500014 ◽

2020 ◽

pp. 2150001

Author(s):

Jorge Cruz López ◽

Alfredo Ibáñez

Keyword(s):

Credit Risk ◽

Stock Price ◽

Risk Model ◽

Cash Flows ◽

Put Option ◽

Endogenous Default ◽

Credit Risk Model ◽

American Put ◽

Crucial Assumption ◽

Credit Contract

In a default corridor [Formula: see text] that the stock price can never enter, a deep out-of-the-money American put option replicates a pure credit contract (Carr and Wu, 2011, A Simple Robust Link between American Puts and Credit Protection, Review of Financial Studies 24, 473–505). Assuming discrete (one-period-ahead predictable) cash flows, we show that an endogenous credit-risk model generates, along with the default event, a default corridor at the cash-outflow dates, where [Formula: see text] is given by these outflows (i.e., debt service and negative earnings minus dividends). In this endogenous setting, however, the put replicating the credit contract is not American, but European. Specifically, the crucial assumption that determines an endogenous default corridor at the cash-outflow dates is that equityholders’ deep pockets absorb these outflows; that is, no equityholders’ fresh money, no endogenous corridor.

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Option Pricing for Path-Dependent Options with Assets Exposed to Multiple Defaults Risk

Discrete Dynamics in Nature and Society ◽

10.1155/2020/2418620 ◽

2020 ◽

Vol 2020 ◽

pp. 1-13

Author(s):

Taoshun He

Keyword(s):

Option Pricing ◽

Default Risk ◽

Asset Price ◽

Default Time ◽

Original Technique ◽

Endogenous Default ◽

Lookback Options ◽

Option Model ◽

Analytical Formulas ◽

Path Dependent

In the present paper, we derive analytical formulas for barrier and lookback options with underlying assets exposed to multiple defaults risks which include exogenous counterparty default risk and endogenous default risk. The endogenous default risk leads the asset price drop to zero and the exogenous counterparty default risk induces a drop in the asset price, but the asset can still be traded after this default time. An original technique is developed to valuate the barrier and lookback options by first conditioning on the predefault and the afterdefault time and then obtaining the unconditional analytic formulas for their price. We also compare the pricing results of our model with the default-free option model and exogenous counterparty default risk option model.

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Endogenous default risk in supply chain and non-linear pricing

International Journal of Production Economics ◽

10.1016/j.ijpe.2011.10.032 ◽

2012 ◽

Vol 139 (1) ◽

pp. 90-96 ◽

Cited By ~ 3

Author(s):

Zhihui Gu ◽

Shiyun Zhang

Keyword(s):

Supply Chain ◽

Default Risk ◽

Endogenous Default ◽

Non Linear

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A Study on Optimal Capital Structure of Vietnamese Real Estate Listed Firms

Journal of Economics and Development ◽

10.33301/jed-p-2018-20-03-04 ◽

2018 ◽

pp. 45-70

Author(s):

Binh Thi Thanh Dao ◽

Phuong Hoai Lai

Keyword(s):

Real Estate ◽

Capital Structure ◽

Stock Returns ◽

Secondary Data ◽

Debt Structure ◽

Theoretical Frameworks ◽

Equity Prices ◽

Listed Firms ◽

Endogenous Default ◽

Primary Focus

This paper focuses on those structural models with an endogenous default barrier where firms optimally choose a default boundary so as to maximize the equity value. The analysis commences to cover avowedly theoretical frameworks from pioneering works by Black-Scholes (1973) and Merton (1974) on zero-coupon debts to later extensions of those models for a more complex debt structure to include coupon perpetual bonds (Leland, 1994) and of arbitrage maturity or rolledover debts (Leland and Toft, 1996). Furthermore, this paper studies the empirical performance of capital structure models by testing the optimized gearing levels computed from those models with different assumptions. Parameters of these models are estimated from the firms’ equity prices. The novelty of this paper lies in the fact that it is not merely a summary of static theories on capital structure but it is the first of its kind to empirically study the capital structure choices of Vietnamese real estate firms, with primary focus on static models. This research follows secondary data analysis to investigate market information of stock returns and attempts to examine the potential dissimilarity in actual and proposed optimal gearing levels for the two years 2014 and 2016.

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