Papers Published in Journals

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Papers Published in Journals

An Introduction to Credit Spread Options

An option conveys to the buyer a right without an obligation. A put option involves the right to sell, and a call option the right to buy. A credit spread option is an option on a particular borrower's credit spread. The credit spread is the difference between the yield on the borrower's debt and the yield on Treasury debt of the same maturity. Credit spread options enable investors to separate credit risk from market risk and other types of risk in a number of situations. The major advantage of credit spread options over credit swaps is that a defined credit event does not have to be specified at the start of the transaction. The payoff is governed solely by measurement of the credit spread rather than a specific credit event. A significant drawback is that credit spread options are difficult to price and hedge.

John D. Finnerty and Murray Grenville, Financier (vol. 9), pp. 64-75. 2002

An Improved Two-Trader Model for Measuring Damages in Securities Fraud Class Actions

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John D. Finnerty and George M. Pushner, Stanford Journal of Law, Business & Finance, pp. 213-263. 2003 Spring

An Analytical Framework for Evaluating Securities Innovations

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John D. Finnerty, Journal of Corporate Finance, pp. 3-18. 1987 Winter

An Analysis of Unbundled Stock Units

This paper analyzes USUs. The analysis is based on the proposed terms of the exchange offers as outlined in the preliminary prospectuses filed with the Securities and Exchange Commission on December 5, 1988. This paper shows that an USU is equivalent to (1) one share of the underlying common stock stripped of its voting rights plus (2) a 30-year guarantee of the current dividend rate plus (3) a deep-in-the-money European put option. This paper identifies transfer-of-wealth effects and negative tax effects that might result from common-for-USU exchanges. It also finds that the stock market's reaction to the announcement of the proposed USU exchange offers was positive but not statistically significant.

John D. Finnerty and Victor M. Borun, Global Finance Journal, pp. 47-69. 1989 Fall

Alternative Approaches to Testing Hedge Effectiveness under SFAS No. 133

Statement of Financial Accounting Standards (SFAS) standardizes the accounting treatment for derivative instruments by requiring all entities to report their derivatives as assets and liabilities on the balance sheet and to measure them at fair value. Reporting changes in the fair value of a derivative in earnings each quarter could create a matching problem. This article examines the test choices that firms must make. The hedger must select the methodology, such as regression analysis, choose the measurement period, and specify an appropriate test statistic like adjusted RI along with the critical value to distinguish a highly effective hedge from one that is not. 4 existing methods of testing hedge effectiveness are described.

John D. Finnerty and Dwight Grant, Accounting Horizons, pp. 95-108. 2002 June

Adjusting the Comparable-Company Method for Tax Differences when Valuing Privately Held "S" Corporations and LLCs

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John D. Finnerty, Journal of Applied Finance, pp.15-30. 2002 Fall/Winter

Adjusting the Binomial Model for Default Risk

The arbitrage-free binomial model has been applied to value bonds with embedded options. This article extends the binomial model to incorporate the risk of payment default. The basic solution procedure is modified by adjusting the expected cash flows for the likelihood of a payment default and the expected cash recovery when a payment default occurs. The default probabilities can be estimated from the historical default experience of similarly rated bonds. The expected cash recoveries can be estimated by calibrating to the yield curve for par value bonds with the same rating. The model is applied to value paymentin-kind debentures, which are rich in embedded options.

John D. Finnerty, Journal of Portfolio Management, pp. 93-103. 1999 Winter

A Visit with Alice in Moneyland

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John D. Finnerty, Journal of Corporate Finance, pp. 46-47. 1987 Spring

A Review of Recent Research Concerning Corporate Debt Provisions

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Douglas R. Emery and John D. Finnerty, Financial Markets, Institutions & Instruments, pp. 23-39. 1992 December