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An Algorithm for the Pricing and Timing of the Option to make a Two-Stage Investment with Credit Guarantees.
- Source :
- Computational Economics; Oct2022, Vol. 60 Issue 3, p1175-1196, 22p
- Publication Year :
- 2022
-
Abstract
- 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. [ABSTRACT FROM AUTHOR]
Details
- Language :
- English
- ISSN :
- 09277099
- Volume :
- 60
- Issue :
- 3
- Database :
- Complementary Index
- Journal :
- Computational Economics
- Publication Type :
- Academic Journal
- Accession number :
- 159355350
- Full Text :
- https://doi.org/10.1007/s10614-021-10220-8