Limited liabilities option valuation model

Силвије Орсаг

Authors

Силвије Орсаг Економски факултет, Свеучилиште у Загребу, Хрватска

Keywords:

Limited liabilities, option valuation model, principal as a call option on company assets, principal as a put option on company assets

Abstract

Limited liabilities are ofen viewed as the valuable protection of personal property to the investors in equity instruments. There are several approaches for valuing limited liabilities. One of them is value of insurance, both, as the value of comparable insurance policy, and as actuary pricing of risk associated with limited liabilities. Another approach is traditional present value of expected cash ﬂows techniques. In this paper value of limited liabilities are analyzed with the third approach, option valuing techniques. Using the option value approach I identified two options associated with limited liabilities: call and put options in share of equity on total assets of over-indebted company. From this approach risky debt can be viewed as risk free debt minus value of call option associated in share of equity. From the put-call parity it is also stated that risky debt can be viewed as risk free debt minus value of put option associated in share of equity. From this viewpoint it is better to understand nature of risky debt, nature of agency problem between company owners and company creditors, and nature of state guaranties given to the fallen business.

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