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Real Options

In: Absence of Arbitrage Valuation

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  • Paskalis Glabadanidis

Abstract

Suppose that the assets of the firms follow a two-state binomial model: The one-period risk-free rate is 5%. It is straightforward to show that p* u = 0.75 and p* d = 0.25. The company has a zero-coupon bond with one period to maturity and face value of 100. Given the possible asset values, the payoffs to the corporate bond are The value of the corporate bond today is 5.1 ( 1 1.05 ) ( 0.75 × 100 + 0.25 × 90 ) = 92.86 ]] ( 1 1.05 ) ( 0.75 × 10 + 0.25 × 0 ) = 7.14. ]]

Suggested Citation

  • Paskalis Glabadanidis, 2014. "Real Options," Palgrave Macmillan Books, in: Absence of Arbitrage Valuation, chapter 5, pages 59-66, Palgrave Macmillan.
    • Handle: RePEc:pal:palchp:978-1-137-37287-1_5
    DOI: 10.1057/9781137372871_5
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