GROWTH OPTION AND DEBT MATURITY WITH EQUITY DEFAULT SWAPS IN A REGIME-SWITCHING FRAMEWORK

Pengfei Luo and Zhaojun Yang

Macroeconomic Dynamics, 2019, vol. 23, issue 6, 2250-2268

Abstract: We consider a firm with assets-in-place and a growth option. There is a funding gap for the expansion investment, which is covered by entering into an equity-for-guarantee swap or fee-for-guarantee swap. We explicitly derive all contingent claim prices with the pricing and timing of the growth option taking business cycle and debt maturity into account. For short-term loan, we produce an explanation why Chinese government suggests that guarantee fee rate should be approximately the fraction 50% of the interest rate of bank loans with the same maturity, but for long-term debt, we show this fraction is too small.

Date: 2019
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