A NOTE ON CORPORATE INVESTMENT DECISIONS AND OPTION PRICING

Using the Black-Scholes option pricing model, numerical examples are given which illustrate the known fact that shareholders in a levered firm might reject investments which are profitable for the company as a whole and accept investments which are unprofitable for the company as a whole. Even the assumption that side-payments are allowed can be inadequate to handle a possible succession of unprofitable projects which are acceptable to shareholders. However, existing company law attempts to provide a solution procedure. The analysis helps to explain why such law has been thought necessary.     

OPTION PRICING AND THE ARBITRAGE PRICING THEORY

This paper applies the arbitrage pricing theory to option pricing. Under certain distribution assumptions or the assumption that there is only one common factor, the underlying asset of an option is the sole risky factor that explains its expected return. Based upon this relationship, a new and simple option-pricing formula is derived, and some important existing option-pricing formulae are reproduced. Empirical results show that the new formula performs as well as the Black-Scholes formula.     

SUBORDINATED BINOMIAL OPTION PRICING

We extend the binomial option pricing model to allow for more accurate price dynamics while retaining computational simplicity. The asset price in each binomial period evolves according to two independent and successive Bernoulli trials on trade occurrence/nonoccurrence and up/down price movement. Subordination leads to a trinomial tree with stochastic volatility in calendar time. We derive utility‐dependent valuation results incorporating the leverage effect and test the model empirically.     

USING AUCTIONS TO ALLOCATE AND PRICE LONG-TERM CREDIT

Most long-term credit in developing countries is allocated throughnegotiated agreements between government institutions and financialintermediaries or final borrowers, and often at administeredrates. Yet many developing countries have no long-term creditmarket whose interest rates can be used as benchmarks for theseloans. If credit is priced improperly, it will be allocatedinefficiently and the development of capital markets may bestunted. In light of the generally disappointing experiencewith conventional methods of allocating development credit,some countries have introduced credit auctions as an alternative.Among the advantages are greater transparency and fairness,lower transaction costs, and increased competition and efficiency.Among the disadvantages are a greater vulnerability to collusion,which can lead to lower interest rates and revenue, and a tendencyto attract the least desirable participants (adverse selection)and to lend for riskier projects (moral hazard), which can leadto lower repayment rates and a higher probability of default.All these factors can lead to inefficiency in the allocationof funds. This article suggests ways to lessen these negativeeffects and presents various elements of auction design thataffect the efficiency of credit auctions and their suitabilityto specific circumstances. When properly designed, auctionscan be used in a variety of environments to allocate developmentcredit more efficiently than current methods do.      

AN EMPIRICAL TEST OF THE COMMODITY OPTION PRICING MODEL USING GINNIE MAE CALL OPTIONS

This paper tests the ability of Black's commodity option pricing model to provide prices for over-the-counter Ginnie Mae call options, which are not significantly different from actual market prices. The test is applied to a unique data set on option prices and Ginnie Mae forward contracts, furnished by a brokerage house specializing in trading government-backed securities. The model generates prices close to those actually available when trading is reasonably active.     

INTER-INDUSTRY DIFFERENCES IN THE RESPONSE OF TRADE CREDIT TO CHANGES IN MONETARY POLICY

Trade Credit is an important source of finance for firms and with increasing emphasis being placed on monetary policy in recent years in many western countries it is important to examine thk relationship between trade credit and monetary policy. This study uses a large firm-based data series to examine various hypotheses concerning the impact and determination of trade credit flows. The study demonstrates significant differences in the exogenous variables across industries and casts considerable doubt on the validity of earlier aggregated studies of the issue. It is also found that whilst there are dif- ferences between industries, tight monetary policy does not seem to be offset by an extension of net trade credit.