Real Options

Paskalis Glabadanidis

Chapter 5 in Absence of Arbitrage Valuation, 2014, pp 59-66 from Palgrave Macmillan

Abstract: Abstract Suppose that the assets of the firms follow a two-state binomial model: The one-period risk-free rate is 5%. It is straightforward to show that p* u = 0.75 and p* d = 0.25. The company has a zero-coupon bond with one period to maturity and face value of 100. Given the possible asset values, the payoffs to the corporate bond are The value of the corporate bond today is 5.1 ( 1 1.05 ) ( 0.75 × 100 + 0.25 × 90 ) = 92.86 ]] ( 1 1.05 ) ( 0.75 × 10 + 0.25 × 0 ) = 7.14. ]]

Date: 2014
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DOI: 10.1057/9781137372871_5

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