Stock Options as Barrier Contingent Claims

SSE/EFI Working Paper Series in Economics and Finance No. 137

37 Pages Posted: 9 Jan 1997

See all articles by Jan Ericsson

Jan Ericsson

McGill University; Swedish Institute for Financial Research (SIFR)

Joel Reneby

Stockholm School of Economics - Department of Finance

Date Written: May 2000

Abstract

We suggest a comprehensive model that values securities as options and consequently ordinary stock options as compound options. Extending the basic Black-Scholes model, we can incorporate common contractual features and stylized facts.

More specifically, we derive a closed form solution for the price of a call option on a down-and-out call. We then show how the obtained result can be generalized in order to price options on complex corporate securities, allowing among other things for corporate taxation, costly financial distress and deviations from the absolute priority rule. The characteristics of the model are illustrated with numerical examples.

JEL Classification: G13

Suggested Citation

Ericsson, Jan and Reneby, Joel, Stock Options as Barrier Contingent Claims (May 2000). SSE/EFI Working Paper Series in Economics and Finance No. 137, Available at SSRN: https://ssrn.com/abstract=726 or http://dx.doi.org/10.2139/ssrn.726

Jan Ericsson (Contact Author)

McGill University ( email )

1001 Sherbrooke St. West
Montreal, Quebec H3A1G5 H3A 2M1
Canada
(514) 398-3186 (Phone)
(514) 398-3876 (Fax)

HOME PAGE: http://people.mcgill.ca/jan.ericsson/

Swedish Institute for Financial Research (SIFR)

Drottninggatan 89
SE-113 59 Stockholm, SE-113 60
Sweden

Joel Reneby

Stockholm School of Economics - Department of Finance ( email )

SE-113 83 Stockholm
Sweden
+46 8 7369143 (Phone)
+46 8 312327 (Fax)

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