The Valuation of Equity Options in the Perpetual-Debt Structural Model

21 Pages Posted: 22 Apr 2019

See all articles by Gaia Barone

Gaia Barone

School of Business, National College of Ireland

Date Written: March 20, 2019

Abstract

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

Barone, Gaia, The Valuation of Equity Options in the Perpetual-Debt Structural Model (March 20, 2019). Available at SSRN: https://ssrn.com/abstract=3356607 or http://dx.doi.org/10.2139/ssrn.3356607

Gaia Barone (Contact Author)

School of Business, National College of Ireland ( email )

Mayor Street
IFSC
Dublin, 1
Ireland

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