When Financial Derivatives can be Applied to the Real Economy – The Case of Exotic Options in Corporate Finance

Jian Wu
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Jian Wu: Neoma Business School, France

Bankers, Markets & Investors, 2016, issue 142, 42-53

Abstract: Product complexity of financial derivatives makes them little accessible to most investors. To help investors better understand these instruments, it is important to show how these sophisticated products work in a “real economy” context by focusing on the economic rationale rather than on quantitative skills. Exotic options are tailor-made derivatives known for their flexibility and accuracy. The present article aims to illustrate how these complex products can be used in corporate finance. Our work may present a three-fold interest. First, it provides an overview on the most common applications of exotic options in corporate finance, more precisely in long-term investment decisions, long-term financing decisions, capital structure analysis, and executive incentive compensations. Second, by putting emphasis on the economic rationale, it seems to be relatively accessible for non-sophisticated investors. Finally, it shows corporate managers how to benefit from technical advances made in financial markets through the application of these techniques in corporate finance.

Keywords: Exotic Options; Real Options; Corporate Finance; Investment Decision; Financing Decision; Capital Structure Analysis; Corporate Governance; Executive Incentive Compensation (search for similar items in EconPapers)
JEL-codes: G13 G19 G32 G34 (search for similar items in EconPapers)
Date: 2016
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