We consider a risk-averse entrepreneur who invests in a project with idiosyncratic risk and takes debt financing for diversification benefits. In contrast to the literature, we assume the entrepreneur is unable to get a loan from a bank directly because of the low creditability of the...

The paper considers the option of an investor to invest in a project that generates perpetual cash flows, of which the drift parameter is unobservable. The investor invests in a liquid financial market to partially hedge cash flow risk and estimation risk. We derive two 3-dimensional non-linear...

We investigate two new types of equity default swaps: an equity-for-guarantee swap (EGS) and an option-for-guarantee swap (OGS). We calculate equilibrium prices for all components of the two swaps. Then we switch to utility-based prices of the entrepreneur's claims. Our analysis shows that under...

The existing risk measures are developed mainly for financial institutions that are too big to fail. This paper proposes a hedging-based utility risk measure (HBU) customized for individual investors requiring a comprehensive risk assessment for financial products. We show that HBU is a convex...

The existing risk measures are developed mainly for financial institutions that are too big to fail. This paper proposes a hedging-based utility risk measure (HBU) customized for individual investors requiring a comprehensive risk assessment for financial products. We show that HBU is a convex...