Stock Options as Barrier Contingent Claims

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