View Proposal #296
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| ID | 296 |
|---|---|
| First Name | Subhra |
| Last Name | Bhattacharya |
| Institution | Iowa State University |
| Speaker Category | graduate student |
| Title of Talk | Stock Loan Subject to Bankruptcy |
| Abstract | In this paper, risk of bankruptcy has been introduced in the valuation of a financial derivative called stock loan. Bankruptcy has been modelled in both structural and reduced form approach. In structural form model, stock loan with finite maturity is considered following the Black-Cox specification of bankruptcy. It has been shown that the valuation of such an asset can be obtained explicitly in terms of the distribution of the first hitting time of Brownian motion and the pricing of the barrier options. In reduced form model, the default intensity has been introduced as in hazard rate models. A closed form solution of the initial value function is obtained, which implicitly defines the optimal exercise boundary. Moreover, this value function reflects an interrelationship between the optimal loan amount and the relevant variables (e.g. loan interest rate, stock price volatility etc). This interrelationship can be used to explain interesting issues such as: how does stock price volatility (or the reputation of the stock) or the loan interest rate affects the optimal loan amount? |
| Subject area(s) | Mathematical Finance |
| Suitable for undergraduates? | No |
| Day Preference | |
| Computer Needed? | Y |
| Bringing a laptop? | Y |
| Overhead Needed? | Y |
| Software requests | |
| Special Needs | |
| Date Submitted | 10/15/2010 |
| Year | 2010 |