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An Algorithm for the Pricing and Timing of the Option to make a Two-Stage Investment with Credit Guarantees
We develop a jump-diffusion model for a guarantee-investment combination financing mode (G-I mode) that is recently popular in financial practice. We assume that a borrower has exclusively an option to invest in a project in two stages. The project’s cash flow follows a double exponential jump-diffu...
Autores principales: | , |
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Formato: | Online Artículo Texto |
Lenguaje: | English |
Publicado: |
Springer US
2021
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Materias: | |
Acceso en línea: | https://www.ncbi.nlm.nih.gov/pmc/articles/PMC8627173/ https://www.ncbi.nlm.nih.gov/pubmed/34866800 http://dx.doi.org/10.1007/s10614-021-10220-8 |
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author | Dong, Linjia Yang, Zhaojun |
author_facet | Dong, Linjia Yang, Zhaojun |
author_sort | Dong, Linjia |
collection | PubMed |
description | We develop a jump-diffusion model for a guarantee-investment combination financing mode (G-I mode) that is recently popular in financial practice. We assume that a borrower has exclusively an option to invest in a project in two stages. The project’s cash flow follows a double exponential jump-diffusion process and it is increased by a growth factor once the second-stage investment is exercised. The first-stage investment cost is financed by a bank loan with the guarantee provided by an insurer, who promises to provide the second-stage investment cost as well as take the lender’s all default losses. In return for the guarantee and investment, the borrower pays a guarantee fee upon first investment and grants a fraction of equity upon second investment to the insurer. In sharp contrast to prior papers on guarantee, the guarantee costs are contracted prior to investment. We provide closed-form solutions and produce a numerical algorithm for the timing and pricing of the two investment options. |
format | Online Article Text |
id | pubmed-8627173 |
institution | National Center for Biotechnology Information |
language | English |
publishDate | 2021 |
publisher | Springer US |
record_format | MEDLINE/PubMed |
spelling | pubmed-86271732021-11-29 An Algorithm for the Pricing and Timing of the Option to make a Two-Stage Investment with Credit Guarantees Dong, Linjia Yang, Zhaojun Comput Econ Article We develop a jump-diffusion model for a guarantee-investment combination financing mode (G-I mode) that is recently popular in financial practice. We assume that a borrower has exclusively an option to invest in a project in two stages. The project’s cash flow follows a double exponential jump-diffusion process and it is increased by a growth factor once the second-stage investment is exercised. The first-stage investment cost is financed by a bank loan with the guarantee provided by an insurer, who promises to provide the second-stage investment cost as well as take the lender’s all default losses. In return for the guarantee and investment, the borrower pays a guarantee fee upon first investment and grants a fraction of equity upon second investment to the insurer. In sharp contrast to prior papers on guarantee, the guarantee costs are contracted prior to investment. We provide closed-form solutions and produce a numerical algorithm for the timing and pricing of the two investment options. Springer US 2021-11-27 2022 /pmc/articles/PMC8627173/ /pubmed/34866800 http://dx.doi.org/10.1007/s10614-021-10220-8 Text en © The Author(s) 2021 https://creativecommons.org/licenses/by/4.0/Open AccessThis article is licensed under a Creative Commons Attribution 4.0 International License, which permits use, sharing, adaptation, distribution and reproduction in any medium or format, as long as you give appropriate credit to the original author(s) and the source, provide a link to the Creative Commons licence, and indicate if changes were made. The images or other third party material in this article are included in the article's Creative Commons licence, unless indicated otherwise in a credit line to the material. If material is not included in the article's Creative Commons licence and your intended use is not permitted by statutory regulation or exceeds the permitted use, you will need to obtain permission directly from the copyright holder. To view a copy of this licence, visit http://creativecommons.org/licenses/by/4.0/ (https://creativecommons.org/licenses/by/4.0/) . |
spellingShingle | Article Dong, Linjia Yang, Zhaojun An Algorithm for the Pricing and Timing of the Option to make a Two-Stage Investment with Credit Guarantees |
title | An Algorithm for the Pricing and Timing of the Option to make a Two-Stage Investment with Credit Guarantees |
title_full | An Algorithm for the Pricing and Timing of the Option to make a Two-Stage Investment with Credit Guarantees |
title_fullStr | An Algorithm for the Pricing and Timing of the Option to make a Two-Stage Investment with Credit Guarantees |
title_full_unstemmed | An Algorithm for the Pricing and Timing of the Option to make a Two-Stage Investment with Credit Guarantees |
title_short | An Algorithm for the Pricing and Timing of the Option to make a Two-Stage Investment with Credit Guarantees |
title_sort | algorithm for the pricing and timing of the option to make a two-stage investment with credit guarantees |
topic | Article |
url | https://www.ncbi.nlm.nih.gov/pmc/articles/PMC8627173/ https://www.ncbi.nlm.nih.gov/pubmed/34866800 http://dx.doi.org/10.1007/s10614-021-10220-8 |
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