Barrier options model for estimate firm´s probabilities for financial distress
Assimilation of the capital value as a call option over firm’s assets allows to develop a group of dynamic models to predict corporate financial distress. However, the concept shows an important weakness: the direct and positive relationship between the capital value (call) with the level of underlying’s volatility. This reasoning indicates that the higher the risk is, the higher the value must be for the firm, leading to a weak rationality, in particular to estimate probabilities of financial distress. The exotic barrier options make an alternative approach for predicting financial distress, and its structure fits better to the firm valuevolatility relationship. The paper proposes a “naive” barrier option model, because it simplifies the estimation of the unobservable variables, like firm asset’s value and risk. First, a simple call and barrier option models are developed in order to value the firm’s capital and estimate the financial distress probability. Using an hypothetical case, it is proposed a sensibility exercise over period and volatility. Similar exercise is applied to estimate the capital value and financial distress probability over two firms of Argentinian capitals, with different leverage degree, confirming the consistency in the relationship between volatility-value-financial distress probability of the proposed model. Finally, the main conclusions are shown.
Saved in:
| Main Author: | |
|---|---|
| Format: | Digital revista |
| Language: | spa |
| Published: |
Escuela de Administración de Empresas. TEC
2016
|
| Online Access: | https://revistas.tec.ac.cr/index.php/tec_empresarial/article/view/2936 |
| Tags: |
Add Tag
No Tags, Be the first to tag this record!
|
| id |
oai:ojs.pkp.sfu.ca:article2936 |
|---|---|
| record_format |
ojs |
| spelling |
oai:ojs.pkp.sfu.ca:article29362019-12-07T00:33:49Z Barrier options model for estimate firm´s probabilities for financial distress Un modelo de opciones barreras para estimar las probabilidades de fracasos financieros de empresas Milanesi, Gastón S. Fracasos financieros opciones reales probabilidad insolvencia opciones barrera valuación Financial distress real options bankruptcy probabilities barrier real options valuation Assimilation of the capital value as a call option over firm’s assets allows to develop a group of dynamic models to predict corporate financial distress. However, the concept shows an important weakness: the direct and positive relationship between the capital value (call) with the level of underlying’s volatility. This reasoning indicates that the higher the risk is, the higher the value must be for the firm, leading to a weak rationality, in particular to estimate probabilities of financial distress. The exotic barrier options make an alternative approach for predicting financial distress, and its structure fits better to the firm valuevolatility relationship. The paper proposes a “naive” barrier option model, because it simplifies the estimation of the unobservable variables, like firm asset’s value and risk. First, a simple call and barrier option models are developed in order to value the firm’s capital and estimate the financial distress probability. Using an hypothetical case, it is proposed a sensibility exercise over period and volatility. Similar exercise is applied to estimate the capital value and financial distress probability over two firms of Argentinian capitals, with different leverage degree, confirming the consistency in the relationship between volatility-value-financial distress probability of the proposed model. Finally, the main conclusions are shown. Asimilar el valor del patrimonio como una opción de compra sobre los activos permitió desarrollar un conjunto de modelos dinámicos para predecir fracasos financieros empresariales. No obstante, el concepto presenta una importante debilidad: la relación directa y positiva entre valor del capital (prima) y el nivel de volatilidad del activo subyacente. El razonamiento anterior indica que a mayor riesgo de la firma mayor debe ser su valor, lo que conduce a una lógica inconsistente para estimar probabilidades de fracasos financieros. Las opciones denominadas “exóticas barreras” constituyen un modelo alternativo para predecir dificultades financieras y su estructura se ajusta mejor a la relación valor-volatilidad en las empresas. El trabajo propone un modelo de opción barrera “operativo”, ya que simplifica la estimación de las inobservables variables: valor y riesgo del activo. Primero, se desarrolló formalmente los modelos de opción de compra simple y opción barrera para valorar el patrimonio de la firma y la estimación de probabilidades de fracaso financiero. Con un caso hipotético, se propuso un ejercicio de sensibilidad sobre volatilidades y plazos. Similar ejercicio se aplicó a dos firmas de capitales argentinos con diferentes grados de endeudamiento, gracias al cual se confirmó la consistencia entre volatilidad-valor-probabilidad de fracasos financieros del modelo propuesto. Finalmente se exponen las principales conclusiones. Escuela de Administración de Empresas. TEC 2016-11-21 info:eu-repo/semantics/article info:eu-repo/semantics/publishedVersion application/pdf https://revistas.tec.ac.cr/index.php/tec_empresarial/article/view/2936 10.18845/te.v10i3.2936 Tec Empresarial; Vol. 10 No. 3 (2016); Pág 7-18 TEC Empresarial; Vol. 10 Núm. 3 (2016); Pág 7-18 1659-3359 1659-2395 spa https://revistas.tec.ac.cr/index.php/tec_empresarial/article/view/2936/2693 Copyright (c) 2016 TEC Empresarial |
| institution |
TEC CR |
| collection |
OJS |
| country |
Costa Rica |
| countrycode |
CR |
| component |
Revista |
| access |
En linea |
| databasecode |
rev-tecempresarial-cr |
| tag |
revista |
| region |
America Central |
| libraryname |
Sistema de Bibliotecas del TEC Costa Rica |
| language |
spa |
| format |
Digital |
| author |
Milanesi, Gastón S. |
| spellingShingle |
Milanesi, Gastón S. Barrier options model for estimate firm´s probabilities for financial distress |
| author_facet |
Milanesi, Gastón S. |
| author_sort |
Milanesi, Gastón S. |
| title |
Barrier options model for estimate firm´s probabilities for financial distress |
| title_short |
Barrier options model for estimate firm´s probabilities for financial distress |
| title_full |
Barrier options model for estimate firm´s probabilities for financial distress |
| title_fullStr |
Barrier options model for estimate firm´s probabilities for financial distress |
| title_full_unstemmed |
Barrier options model for estimate firm´s probabilities for financial distress |
| title_sort |
barrier options model for estimate firm´s probabilities for financial distress |
| description |
Assimilation of the capital value as a call option over firm’s assets allows to develop a group of dynamic models to predict corporate financial distress. However, the concept shows an important weakness: the direct and positive relationship between the capital value (call) with the level of underlying’s volatility. This reasoning indicates that the higher the risk is, the higher the value must be for the firm, leading to a weak rationality, in particular to estimate probabilities of financial distress. The exotic barrier options make an alternative approach for predicting financial distress, and its structure fits better to the firm valuevolatility relationship. The paper proposes a “naive” barrier option model, because it simplifies the estimation of the unobservable variables, like firm asset’s value and risk. First, a simple call and barrier option models are developed in order to value the firm’s capital and estimate the financial distress probability. Using an hypothetical case, it is proposed a sensibility exercise over period and volatility. Similar exercise is applied to estimate the capital value and financial distress probability over two firms of Argentinian capitals, with different leverage degree, confirming the consistency in the relationship between volatility-value-financial distress probability of the proposed model. Finally, the main conclusions are shown. |
| publisher |
Escuela de Administración de Empresas. TEC |
| publishDate |
2016 |
| url |
https://revistas.tec.ac.cr/index.php/tec_empresarial/article/view/2936 |
| work_keys_str_mv |
AT milanesigastons barrieroptionsmodelforestimatefirmsprobabilitiesforfinancialdistress AT milanesigastons unmodelodeopcionesbarrerasparaestimarlasprobabilidadesdefracasosfinancierosdeempresas |
| _version_ |
1763178651618115584 |