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A Contingent Claims Analysis of Trade Credit

Author

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  • Paul D. Adams
  • Steve B. Wyatt
  • Yong H. Kim

Abstract

We investigate trade credit decisions using a framework which reflects capital market equilibrium via contingent claims analysis. We approach the valuation of trade credit from the perspective of straightforward evaluation of risky debt. By modeling the trade credit limit decision in this way, optimal decisions on the part of the seller and buyer are assumed. This paper has two purposes. First, to develop a theoretically plausible credit-valuation framework. Second, to illustrate the proper use of this framework for effectively setting credit limits.

Suggested Citation

  • Paul D. Adams & Steve B. Wyatt & Yong H. Kim, 1992. "A Contingent Claims Analysis of Trade Credit," Financial Management, Financial Management Association, vol. 21(3), Fall.
    • Handle: RePEc:fma:fmanag:adams92
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    Cited by:

    1. Lim, Terence & Lo, Andrew W. & Merton, Robert C. & Scholes, Myron S., 2006. "The Derivatives Sourcebook," Foundations and Trends(R) in Finance, now publishers, vol. 1(5–6), pages 365-572, April.
    2. Inmaculada Aguiar-Díaz & Ewelina Mruk & María Victoria Ruiz-Mallorquí, 2024. "How judicial efficiency impacts trade credit and doubtful receivables," European Journal of Law and Economics, Springer, vol. 57(1), pages 63-91, April.
    3. Dariusz Nowak & Sławomir Gorczynski, 2020. "A Qualitative Approach to Trade Credit in Business Organisations," Business Management, D. A. Tsenov Academy of Economics, Svishtov, Bulgaria, issue 1 Year 20, pages 25-41.

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