Abstract
In this chapter, we introduce the basic concepts of call and put options. Second, we discuss the Black-Scholes option pricing model and its application. Third, we discuss how to apply the option pricing theory in capital structure issue. Finally, the warrant, one type of equity options, is discussed in detail.
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Notes
- 1.
Compared to the CAPM, the option pricing model (OPM) is a relative pricing approach. In the CAPM, the major determinants are risk and return. In the OPM, the return of the asset or the market does not affect the option value.
- 2.
If we use monthly rate of return to calculate the variance, then the annualized variance will be 12 times the monthly variance.
- 3.
These bonds will sell for less than the face value, the difference reflecting interest to be paid on the loan.
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Lee, C.F., Finnerty, J.E., Shih, WK. (2010). Option Pricing Theory and Firm Valuation. In: Lee, CF., Lee, A.C., Lee, J. (eds) Handbook of Quantitative Finance and Risk Management. Springer, Boston, MA. https://doi.org/10.1007/978-0-387-77117-5_23
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