By Alexandre Ziegler
This e-book offers a style that mixes video game thought and choice pricing so that it will study dynamic multiperson determination difficulties in non-stop time and lower than uncertainty. the elemental instinct of the strategy is to split the matter of the valuation of payoffs from the research of strategic interactions. while the previous is to be dealt with utilizing choice pricing, the latter should be addressed by way of video game idea. The textual content exhibits how either tools might be mixed and the way video game conception might be utilized to advanced difficulties of company finance and monetary intermediation. along with offering theoretical foundations and serving as a advisor to stochastic video game concept modeling in non-stop time, the textual content includes a number of examples from the idea of company finance and monetary intermediation. via combining arbitrage-free valuation thoughts with strategic research, the sport thought research of strategies truly presents the hyperlink among markets and enterprises.
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Additional info for A Game Theory Analysis of Options: Contributions to the Theory of Financial Intermediation in Continuous Time
_---'--,_--'--c- = for 1+ a1? ) r* > o. Thus, expression (63) is positive as well.
This assumption, however, is not realistic. In many situations, the agent can be expected to be better informed about the success of his project than the principal. Our analysis has to take into account the possibility of the agent lying to the principal when reporting realized project return. Under the incentive contract derived above, the agent has a strong incentive to understate the true 26 2. Credit and Collateral success of the project, and as a result of this misinformation, having to pay less to the principal.
61) t? 8 Inspection of equation (61) shows that W(S) - S does not depend on tjJ. Hence, once account is taken of the borrower's capital structure choice, he is indifferent as to which interest rate he effectively has to pay to the lender. Such is not the case, however, for the interest rate differential r - r * . To see this, recall that dy* 2 (62) d(r-r*) -~. 6 The Financing Decision 45 40 35 CD ;:s iii ........ 07 . As r - r * is increased, net equity value rises, implying that an increase in r* reduces net equity value.