Abstract

Assimilation of the capital value as a call option over The paper proposes a “naive” barrier option model, firm’s assets allows to develop a group of dynamic models because it simplifies the estimation of the unobservable to predict corporate financial distress. However, the concept variables, like firm asset’s value and risk. First, a simple call shows an important weakness: the direct and positive and barrier option models are developed in order to value the relationship between the capital value (call) with the level firm’s capital and estimate the financial distress probability. of underlying’s volatility. This reasoning indicates that Using an hypothetical case, it is proposed a sensibility the higher the risk is, the higher the value must be for the exercise over period and volatility. Similar exercise is applied firm, leading to a weak rationality, in particular to estimate to estimate the capital value and financial distress probability probabilities of financial distress. The exotic barrier options over two firms of Argentinian capitals, with different leverage make an alternative approach for predicting financial degree, confirming the consistency in the relationship distress, and its structure fits better to the firm value- between volatility-value-financial distress probability of the volatility relationship. proposed model. Finally, the main conclusions are shown.

Key Words: Financial distress; real options; bankruptcy probabilities; barrier real options; valuation