The Valuation of Equity Options in the Perpetual-Debt Structural Model
21 Pages Posted: 22 Apr 2019
Date Written: March 20, 2019
We propose some formulas for the valuation of equity options in the Perpetual-Debt Structural Model (PDSM), where stockholders have a perpetual American option to default.
Our formulas are expressed in terms of binary barrier options, using the results obtained by Rubinstein and Reiner (1991). We also use the results obtained by Barone (2013), where it is proved that perpetual American options follow a geometric Brownian motion, under the standard Black-Scholes-Merton assumptions.
Keywords: credit, banking, risk management
JEL Classification: G13
Suggested Citation: Suggested Citation