Written by Marc Oliveras

Article 4, Volume 2 Issue 2:

Firm valuation and default probability through exotic (barrier) options

Gaston Milanesi, Gabriela Pesce and Emilio El Alabi

DOI: 10.26595/eamr.2014.2.2.4


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.


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

Download Article

By continuing to use the site, you agree to the use of cookies. more information

The cookie settings on this website are set to "allow cookies" to give you the best browsing experience possible. If you continue to use this website without changing your cookie settings or you click "Accept" below then you are consenting to this.