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This framework is therefore ābroader than āoption pricingā because it encompasses the full gamut of valuation approaches directed toward the pricing of contingent claims.ā This would include "the full range of models designed to price government, corporate, and
32:ā asset, or more generally, that is dependent on the realization of some uncertain future event. These are so named, since there is only a payoff under certain contingencies. Any derivative instrument that is not a contingent claim is called a
122:, and to then use claims to represent and value state outcomes. Thus given a definition of risky states, all financial instruments and arrangements can be represented as combinations of contingent claims on those states. See
160:, is āthe acceptance, at least in some cases, that the value of an asset may be greater than the present value of expected cash flows, if the cash flows are contingent on the occurrence or non-occurrence of an eventā. This
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is widely used as a framework both for developing pricing models, and for extending the theory. Thus, from its origins in option pricing and the valuation of corporate liabilities, it has become a major approach to
175:. The fundamental premise here, is that ādiscounted cash flow models tend to understate the value of assets that provide payoffs that are contingent on the occurrence of an event." See
396:
Black, Fischer; Myron
Scholes (1973). "The Pricing of Options and Corporate Liabilities". Journal of Political Economy. 81 (3): 637ā654. doi:10.1086/260062.
317:
171:
While these models were initially used to value traded options, there has been an attempt in recent years to extend the reach of these models into
418:
David F. Babbel and Craig R. Merrill (1996). Valuation of
Interest-Sensitive Financial Instruments (SOA Monograph M-FI96-1). Wiley.
180:
480:
409:, in The New Paigrave Dictionary of Money and Finance, eds J Eatwell, M Milgate and P Newman, Macmillan (1992), pp 437-440
406:
435:
387:(2012). Introduction to Contingent Claims Analysis, in Encyclopedia of Financial Models, Frank Fabozzi ed. Wiley (2012)
423:
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Valuation
Techniques: Discounted Cash Flow, Earnings Quality, Measures of Value Added, and Real Options
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462:, Vol. 3, No. 4, Fourth Quarter 2005; ~ (2006). Part II, Vol. 4, No. 1, First Quarter 2006.
237:
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8:
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63:
456:. (2005). "Great Moments in Financial Economics: IV. The Fundamental Theorem (Part I)",
282:. (2007). Contingent Claims Approach to Measuring and Managing Sovereign Credit Risk.
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Investment
Valuation: Tools and Techniques for Determining the Value of any Asset
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there. (One major modification here is that these models often rely on a
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also often inhere optionality and must then be modeled correspondingly.
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to measure the value of assets that share option-like characteristics.
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which similarly exhibit option like characteristics. Examples are
78:, decomposing the value of a corporate into a set of options in his "
298:(1979). The Pricing of Contingent Claims in Discrete Time Models.
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The general approach here is to define risky outcomes relative to
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are forward commitments, since these grant no such optionality.
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Contingent claim valuation is also used to value specific
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What kinds of derivatives are types of contingent claims?
210:. Funding dependent, corporate financial investments and
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A contingent-claims valuation of convertible securities
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whose future payoff depends on the value of another ā
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Business valuation Ā§ Option pricing approaches
493:Pricing Corporate Securities as Contingent Claims.
187:as opposed to traditional risk neutral pricing.)
512:
434:See for example: Jonathan E. Ingersoll (1977).
379:
377:
152:Valuation (finance) Ā§ Valuation overview
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412:
208:Valuation (finance) Ā§ Specialised cases
206:ā all of these exhibiting optionality. See
144:Corporate finance Ā§ Valuing flexibility
374:
365:Robert C. Merton and the Science of Finance
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333:
331:
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101:intertemporal equilibrium under uncertainty
471:David T. Larrabee, Jason A. Voss (2012).
444:Volume 4, Issue 3, May 1977, Pages 289-321
399:
302:. Vol. 34, No. 1 (Mar., 1979), pp. 53-68
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132:Financial economics Ā§ State prices
66:in developing models and theory, and in
39:The prototypical contingent claim is an
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405:Simon Babbs and Michael Selby (1992).
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310:
308:
289:
270:
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192:corporate finance "project" valuations
181:Ā§ Applicability of standard techniques
111:... as well as options and futures on
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200:undeveloped natural resource reserves
369:Annual Review of Financial Economics
339:"Approaches to valuation", Ch2. in
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62:Contingent claims are applied under
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265:
13:
14:
532:
286:, Vol. 5, No. 4, (2007), pp. 5ā28
459:Journal of Investment Management
284:Journal of Investment Management
74:. This approach originates with
475:. John Wiley & Sons, 2012.
447:
428:
441:Journal of Financial Economics
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254:contingent convertible bonds
7:
491:Kenneth D. Garbade (2001).
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537:
407:Contingent Claims Analysis
371:, Vol. 12, pp. 19-38, 2020
173:more traditional valuation
162:contingent claim valuation
141:
109:mortgage-backed securities
347:. John Wiley & Sons.
96:contingent claim analysis
212:special purpose entities
156:A recent development in
204:contingent value rights
113:fixed income securities
300:The Journal of Finance
238:convertible securities
230:employee stock options
177:Real options valuation
521:Derivatives (finance)
185:replicating portfolio
166:option pricing models
142:Further information:
124:Arrow-Debreu security
383:Edwin H. Neave and
128:Risk-neutral measure
120:states of the world
92:financial economics
86:Financial economics
72:valuation framework
64:financial economics
363:Zvi Bodie (2020).
82:" of credit risk.
34:forward commitment
481:978-1-118-39743-5
158:corporate finance
138:Corporate finance
68:corporate finance
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341:Aswath Damodaran
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276:Robert C. Merton
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246:embedded options
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250:callable bonds
194:would include
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316:Sean Ross.
242:investments
226:liabilities
260:References
236:and other
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26:derivative
496:MIT Press
280:Zvi Bodie
515:Category
343:(2012).
248:such as
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190:Typical
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