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When Financial Derivatives can be Applied to the Real Economy [extrait BMI 142]

Author : Wu Jian
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Product complexity of financial derivatives makes them little accessible to most investors. To help investors better understand these instruments, it is important to show how these sophisticated products work in a ?real economy? context by focusing on the economic rationale rather than on quantitative skills. Exotic options are tailor-made derivatives known for their flexibility and accuracy. The present article aims to illustrate how these complex products can be used in corporate finance. Our work may present a three-fold interest. First, it provides an overview on the most common applications of exotic options in corporate finance, more precisely in long-term investment decisions, long-term financing decisions, capital structure analysis, and executive incentive compensations. Second, by putting emphasis on the economic rationale, it seems to be relatively accessible for non-sophisticated investors. Finally, it shows corporate managers how to benefit from technical advances made in financial markets through the application of these techniques in corporate finance.Keywords: Exotic Options; Real Options; Corporate Finance; Investment Decision; Financing Decision; Capital Structure Analysis; Corporate Governance; Executive Incentive Compensation.JEL Codes: G13; G19; G32; G34.

Auteurs :Wu Jian
Extrait de la revue BMI 142


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