The barrier options theory of corporate security valuation is applied to the contingent claims of a regulated bank. The regulator/insurer of a bank owns a down-and-in call option on the bank assets which can be balanced against the expected coverage cost. Raising the regulatory barrier (critical...

The paper shows how the traditional credit model based on contingent claims analysis can be adjusted when the capital structure includes a short position in a call or put option. The stochastic features of the asset underlying the option introduce additional risk elements into the analysis of...