Working Paper: CEPR ID: DP415
Authors: Stijn Claessens; Sweder van Wijnbergen
Abstract: We present a pricing model for secondary market debt designed to assess the impact of debt reduction on valuation of remaining claims and to value guarantees in various forms. The technique used, option pricing, accounts explicitly for the sources and natures of risks on secondary market pricing and of the market value of various forms of guarantees. The method can handle different maturity schedules, expectations regarding foreign exchange availability and willingness to pay, and differences in seniority. The method is applied to an analysis and evaluation of the recent Mexico debt restructuring packa.
Keywords: secondary debt market; option pricing; debt restructuring
JEL Codes: 400; 433; 121
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| debt reduction (H63) | valuation of remaining claims (J17) |
| debt reduction (H63) | market value of remaining claims (G22) |
| amount of debt relief (H63) | incremental value of rolling guarantees over fixed guarantees (D25) |
| seniority structures (D73) | market prices of new debt instruments (G12) |
| debt restructuring agreement enhancements (F34) | market value (D46) |
| debt restructuring agreement without enhancements (G33) | market value (D46) |