Finance School of management Chapter 16: The Valuation of Contingent Claims Objective To explain the theory and application of the Contingent-claim valuation method uesTc
1 Finance School of Management Chapter 16: The Valuation of Contingent Claims Objective •To explain the theory and application of the Contingent-claim valuation method
Finance School of management Chapter 16 Contents Contingent Claims Analysis of Corporate Debt and equity : Convertible bonds valuing Pure State- Contingent Securities uesTc
2 Finance School of Management Chapter 16 Contents ❖ Contingent Claims Analysis of Corporate Debt and Equity ❖ Convertible Bonds ❖ Valuing Pure State-Contingent Securities
Finance School of management Objectives To show how the option pricing method can be applied to pricing of contingent-claims uesTc
3 Finance School of Management Objectives ❖ To show how the option pricing method can be applied to pricing of contingent-claims
Finance School of management Valuation of uncertain cash flows CCA/DCF The dCf approach discounts the expected cash flows using a risk-adjusted discount rate .s The Contingent-Claims Analysis(CCa)uses knowledge of the prices of one or more related assets and their volatilities uesTc
4 Finance School of Management Valuation of Uncertain Cash Flows: CCA / DCF ❖ The DCF approach discounts the expected cash flows using a risk-adjusted discount rate ❖ The Contingent-Claims Analysis (CCA) uses knowledge of the prices of one or more related assets and their volatilities
Finance School of management An Example: Debtco Corp Debtco is in the real-estate business It issues two types of securities common stock(I million shares) corporate bonds with an aggregate face value of $80 million( 80,000 bonds, each with a face value of $1,000) and maturity of 1 year risk-free interest rate is 4% :o The total market value of Debtco is $100 million uesTc
5 Finance School of Management An Example: Debtco Corp. ❖ Debtco is in the real-estate business ❖ It issues two types of securities: – common stock (1 million shares) – corporate bonds with an aggregate face value of $80 million (80,000 bonds, each with a face value of $1,000) and maturity of 1 year – risk-free interest rate is 4% ❖ The total market value of Debtco is $100 million