Valuation of Put Options on Leveraged Equity

Marco Realdon

Discussion Papers from Department of Economics, University of York

Abstract: This paper presents new closed form solutions for the valuation of European put options and of "down-an-in" barrier options written on leveraged equity. Unlike in past literature (Toft and Prucyk, 1997) and in keeping with empirical evidence, the model allows equity to retain value even after the firm's default and reorganisation. This stylised fact can significantly alter the valuation of equity put and "down-and-in" options as bankruptcy costs, bargaining power of equity holders, debt maturity and other firm parameters change. The value of "in-the-money" puts often decreases in the firm's assets volatility. The model can produce a variety of realistic implied equity volatility "skews".

Keywords: Equity put options; Leveraged equity; Default and reorganisation; Barrier options; "down-and-in" options (search for similar items in EconPapers)
JEL-codes: G13 G33 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cfn and nep-rmg
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