Evaluate of the Merton Model for credit risk analysis The KMV-Merton model proposed by Robert Merton(1974)is an application of classic option pricing theory and as a logical extension of the Black-Scholes(1973)option pricing framework.Merton’s approach assess the credit risk of a firm by characterizing the firm’s equity as a call option on the underling value of the firm with a strike price equal to the face value of the firm’s debt and a time-to-maturity of T.By put-call parity,the value of the
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2 Finance Theories Taxonomy This document presents a taxonomy of selected finance theories developed in past 5 decades by academics, practitioners and scholars in the United States, Europe, Asia and Latin America. A total of 14 theories and models are synthesized in this work, organized in five tables with the same structure: Theories of capital structure; capital budgeting and cost of equity; asset valuation, financial behavior and international finances. Each table contains theories organized
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INTRODUCTION The emergence of the market for derivative products, most notably forwards, futures and options, can be traced back to the willingness of risk-averse economic agents to guard themselves against uncertainties arising out of fluctuations in asset prices. By their very nature, the financial markets are marked by a very high degree of volatility. Through the use of derivative products, it is possible to partially or fully transfer price risks by locking-in asset prices. As instruments
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CONTRIBUTORS IN SOCIOLOGY Auguste Comte-(1898-1857) He is considered as father of sociology. Comte was born at Montpellier, in France. He founded the philosophy of positivism, and originated a concept of social science known as sociology. Comte sought to discover the laws that he believed governed the evolution of the mind. In his six-volume work, The Course of Positive Philosophy (1830-1842), he framed his "law of the three states." This law advanced the idea that people try
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Elephant Bar Restaurant: Mezzanine Financing Oday Tillawi Professor Shelly Canterbury Finance 441-001 Spring 2016 03/29/2016 Executive Summary: Elephant Bar Restaurant is a California based company founded by Chris Nancarrow in 1979. The restaurant started as a test concept of Carrow’s Restaurants, a chain of more than 150 full-service restaurants. Elephant bar was sold to W. R. Grace in 1985, and repurchased in 1993. The company aims to differentiate itself through innovative culinary
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Efficient Markets (Fama, 1965, 1970) • Options Pricing Theory (Black & Scholes, 1973, Myers, 1977) • Agency Theory (Jensen, Meckling, 1976) • Efficient Markets II (Fama, 1991) • Behavioural Finance (Kahneman & Tversky, 1979, Shiller, 1981, 2000) Portfolio Selection • Investors are rationals and risk averse • Diversification lowers specific risk • Any portfolio is a combination of the market portfolio and the riskless asset The CAPM Capital Asset Pricing Model • Systematic risk of an asset is measured
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rates. Options are another risk management method GP utilizes. Options are guarantees to buy or sell a stock at a specified value by a given date. One method used to valuate options is known as the Black-Scholes options pricing model. This method uses five parameters to calculate the value of a call. The information needed is the current stock price, exercise price of the call, continuous risk free rate, variance per year of the stock price, and the time to expiration of the option. A current
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X=50, simple annual risk-free interest rate is 5%, standard deviation of monthly stock returns is 10%. [Caution: must covert to annualized continuous compounding values] 1. What is the value of a one-year European call option using the Black-Scholes option pricing model? Show values of N(d1) and N(d2) using Excel and using the formula provided in the lecture note. rc = ln (1+rs) = 0.04879 = 4.879% d1 = [ln 50/50 + 4.879%*1 + (10%2*1)/2] / (10%*√1) = [0 + 4.879% + 0.005]
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information Michael.Bloss@HFWU.de Michael.Bloss@EIFD.de Michael Bloss Agenda for this course Derivatives exchanges Options Pricing Strategies Future Pricing Strategies Strategies and the pricing of options on futures Commodity and foreign exchanges futures Synthetic combinations and trading strategies Margining Risk controlling OTC derivatives SWAP OTC options Exotic options … Michael Bloss Derivatives to be in use in FE and portfolio management Case study … Literature list SET BOOKS:
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Chapter 2: Real Options Chapter Introduction and Objectives: Managers often overrule NPV based recommendations in capital budgeting on strategic grounds. Does it mean that the NPV approach is flawed? The standard DCF methodology assumes that managers make an investment decision and then see how the market evolves. In many situations managers can wait and then make a decision. The latter is an option - an option to defer or time the investment decision. Pharmaceutical companies, for example
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