The default risk of swaps

Article Abstract:

We characterize the exchange of financial claims from risky swaps. These transfers are among three groups: shareholders, debtholders, and the swap counterparty. From this analysis we derive equilibrium swap rates and relate them to debt market spreads. We then show that equilibrium swaps in perfect markets transfer wealth from shareholders to debtholders. In a simplified case, we obtain closed-form solutions for the equilibrium swap rate, including default risk. We compare these with equilibrium debt market default risk spreads. (Reprinted by permission of the publisher.)

Research, Finance, Corporations, Corporate finance, Interest rate swaps, Swaps (Finance)

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Measuring the agency cost of debt

Article Abstract:

We adopt a contingent claims model of the firm to reflect the incentive effects of the capital structure and thereby to measure the agency costs of debt. An underlying model of the firm and the stochastic features of its product market are analyzed and an optimal operating policy is chosen. We identify the change in operating policy created by leverage and value this change. The model determines the value of the firm and its associated liabilities incorporating the agency consequences of debt. (Reprinted by permission of the publisher.)

Evaluation, Capital stock, Debt financing (Corporations), Debt financing

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Arbitraging arbitrageurs

Article Abstract:

A study suggesting that a strategic trading pattern emerges in markets based on capital constraints of arbitrageurs is presented.

United Kingdom, Analysis, Arbitrage, Securities trading

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