Contingent claim approach to analyzing corporate Contingent claim approach to analyzing corporate securities and financial contracts

Y.K. Kwok

Department of Mathematics, Hong Kong University of Science and Technology (maykwok@uxmail.ust.hk)

Abstract

In the seminar work by Black and Scholes, they demonstrate how corporate liabilities can be analyzed using the option pricing approach. This generalization of option pricing, known as the Contingent Claims Analysis (CCA), has been used by many finance researchers as a theoretical framework to view the pricing of corporate securities and financial contracts. Merton pioneered the use of CCA to the analysis of default risk in corporate debt.The modelling methodologies of the default mechanisms and bankruptcy settlement clauses have been refined and enhanced by later works. This talk surveys some of the most recent developments in the analysis of default risk models of corporate debts along several extensions. These include stochastic interest rates, intertemporal default before maturity of the debt, various clauses or provisions in the debt contracts, financial distress that can occur throughout the life of the debt, possible violation of strict priority rules, bankruptcy costs, tax effects, etc. The impact of default risk on rates or prices on which derivative products are written is also addressed. In particular, the default risk models of swaps and mortgage securities are discussed.


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On 14 May 1999, 09:37.