Article 4, Volume 5 Issue 1

A Binomial Model with Edgeworth Expansion on Particular Circumstances

Author

Gaston Milanesi – (Universidad Nacional del Sur)

Emilio El Alabi – (Universidad Nacional del Sur)

Received July 15, 2018; accepted October 22, 2018.

Abstract

Contexts with high volatility and extreme events condition the value of the firm, its tax savings and continuity. These conditions must be contemplated for the employed valuation model. In that sense, the present paper’ basis is the classic binomial model incorporating: a) firm contingent states of continuity or dissolution; b) tax saving valuation like a basket of real options, and c) extreme events by Edgeworth transformation. The paper structures in the following manner: first it develops the binomial function changed with the Edgeworth extension and the construction of implicit binomial lattice. Then it develops a valuation adapted to the binomial model with Edgeworth expansion that incorporates contingent tax savings, continuity or liquidation scenarios and cost of bankruptcy. With a hypothetical case it is illustrated its functioning, and comparing the results obtained between situations with kurtosis and skewness or normally. Finally the main conclusions are exposed.

Los contextos con alta volatilidad y eventos extremos condicionan el valor de la empresa, su ahorro fiscal y su continuidad. Estas condiciones deben contemplarse para el modelo de valoración empleado. En ese sentido, la base del presente trabajo es el modelo binomial clásico que incorpora: a) estados contingentes firmes de continuidad o disolución; b) valoración del ahorro fiscal como una canasta de opciones reales, y c) eventos extremos por transformación de Edgeworth. El papel se estructura de la siguiente manera: primero desarrolla la función binomial cambiada con la extensión de Edgeworth y la construcción de una red binomial implícita. Luego, desarrolla una valoración adaptada al modelo binomial con la expansión de Edgeworth que incorpora el ahorro de impuestos contingentes, los escenarios de continuidad o liquidación y el costo de la bancarrota. Con un caso hipotético se ilustra su funcionamiento, y se comparan los resultados obtenidos entre situaciones con curtosis y asimetría o normalmente. Finalmente se exponen las principales conclusiones.

Citation

Milanesi, G. S. & El Alabi, E. (2018). A binomial model with Edgeworth expansion on particular circumstances.European Accounting and Management Review5(1), 69-93.

Figures

Keywords

  • Contingent States
  • Real options
  • Tax Savings
  • Edgeworth Expansion

Palabras clave

  • Estados contingentes
  • Opciones reales
  • Ahorro de impuestos
  • Expansión de Edgeworth

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Article 4, Volume 2 Issue 2:

Firm valuation and default probability through exotic (barrier) options

Author

Gaston Milanesi – (Universidad Nacional del Sur)

Gabriela Pesce – (Universidad Nacional del Sur)

Emilio El Alabi – (Universidad Nacional del Sur)

Received April 11, 2016; accepted May 23, 2016.

Abstract

Real option theory allows using financial option models to value investments and firms. Traditional models present a substantial problem to positively correlate underlying asset volatility with firm value. Therefore, an alternative approach is used based on a particular type of exotic option, the barrier one. This dynamic model helps estimating default probability incorporating the negative impact that excessive risk has on firm value. The article presents a hypothetical example illustrating similarities and differences between the proposed model and the traditional version. Finally, this model is applied on two of the leading companies in the Argentinean capital market which are characterized by different levels of leverage demonstrating the robustness of the results. The predicted default probability increases with the rise in assets volatility and the time horizon of debt maturity.

La teoría de la opción real permite utilizar modelos de opciones financieras para valorar las inversiones y las empresas. Los modelos tradicionales presentan un problema sustancial para correlacionar positivamente la volatilidad de los activos subyacentes con el valor de la empresa. Por lo tanto, se utiliza un enfoque alternativo basado en un tipo particular de opción exótica, la barrera. Este modelo dinámico ayuda a estimar la probabilidad de incumplimiento incorporando el impacto negativo que el riesgo excesivo tiene en el valor de la empresa. El artículo presenta un ejemplo hipotético que ilustra similitudes y diferencias entre el modelo propuesto y la versión tradicional. Finalmente, este modelo se aplica a dos de las empresas líderes en el mercado de capitales argentino que se caracterizan por diferentes niveles de apalancamiento que demuestran la solidez de los resultados. La probabilidad de incumplimiento prevista aumenta con el aumento de la volatilidad de los activos y el horizonte temporal del vencimiento de la deuda.

Citation

Milanesi, G. S., Pesce, G., & El Alabi, E. (2016). Firm valuation and default probability through exotic (barrier) options. European Accounting and Management Review2(2), 56-76.

Figures

Keywords

  • Default probability
  • Firm valuation
  • Barrier option
  • Volatility
  • Credit risk
  • Call option

Palabras clave

  • Probabilidad por defecto
  • Valoración de la empresa
  • Opción de barrera
  • Volatilidad
  • Riesgo crediticio
  • Opción de llamada

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