A framework for valuing derivative securities

This paper develops a general framework for valuing a wide range of derivative securities. Rather than focusing on the stochastic process of the underlying security and developing an instantaneously-riskless hedge portfolio, we focus on the terminal distribution of the underlying security. This enables the derivative security to be valued as the weighted sum of a number of component pieces. The component pieces are simply the different payoffs that the security generates in different states of the world, and they are weighted by the probability of the particular state of the world occurring. A full set of derivations is provided. To illustrate its use, the valuation framework is applied to plain-vanilla call and put options, as well as a range of derivatives including caps, floors, collars, supershares, and digital options.

On the relation between ownership structure and capital structure

The agency relationship between managers and shareholders has the potential to influence decision-making in the firm which in turn potentially impacts on firm characteristics such as value and leverage. Prior evidence has demonstrated an association between ownership structure and firm value. This paper extends the literature by examining a further link between ownership structure and capital structure. Using an agency framework, it is argued that the distribution of equity ownership among corporate managers and external blockholders may have a significant relation with leverage. The empirical results provide support for a positive relation between external blockholders and leverage, and non-linear relation between the level of managerial share ownership and leverage. The results also suggest that the relation between external block ownership and leverage varies across the level of managerial share ownership. These results are consistent with active monitoring by blockholders, and the effects of convergence-of-interests and management entrenchment.