Contingent Claims Analysis in Corporate Finance

M. Crouhy, D. Galai and Zvi Wiener

Chapter 24 in Options — 45 Years since the Publication of the Black–Scholes–Merton Model:The Gershon Fintech Center Conference, 2023, pp 495-520 from World Scientific Publishing Co. Pte. Ltd.

Abstract: The Contingent Claims Analysis (CCA) is a general approach to analyze the stakeholders of a corporation who have contingent claims on the future, uncertain cash-flows generated by the operations of the firms. The CCA allows valuing each stakeholder’s claim and also to assess the risk incurred by the stakeholders. The CCA highlights the potential conflicts of interest among the various claimholders. In this paper, we review applications of CCA including valuation of various forms of debt, rating, credit spread, probability of default and corporate events like dividends, employee stock options and M&A. The CCA framework is shown to be useful to address all these financial questions. In this approach the starting point is that the value and the risk of the firm’s assets are given. The future distribution of the assets’ rates of return is also known and given. The focus is on the liability side of the balance sheet, i.e., the funding sources of the activity of the firm, and more generally on the financial claims of the various claimholders of the firm.

Keywords: Options; Call; Put; Stock; Equity; Bond; Debt; Dividend; Investment; Diversification; Volatility; Black–Scholes; Merton Model; Stochastic; Swap; Commodity; Index; Contingent Claims; Exotic Option (search for similar items in EconPapers)
JEL-codes: C C02 G1 G11 G12 G15 (search for similar items in EconPapers)
Date: 2023
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