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Exchange ratios in a merger with stochastic capital reserves: fair valuation and embedded options

Bruno Giacomello (Faculty of Economics, University of Verona, Verona, Italy)

Managerial Finance

ISSN: 0307-4358

Article publication date: 14 March 2008




The purpose of this paper is to analyze how exchange ratios in mergers can be assessed when the companies economic capital valuation is carried out in a stochastic framework with financial assets and minimum guarantees.


The paper is a theoretical one. Its main objective is to present a quantitative model for exchange ratios accounting, introducing a stochastic pricing model in the presence of stochastic cash‐flows and representing contractual embedded real option such as minimum guarantees.


The paper presents a financial model to evaluate the differences in exchange ratios induced by stochastic capital reserves in the merging companies.

Research limitations/implications

Stochastic cash‐flows in the economic capital of the merging companies set up a stochastic capital reserve which represents an additional value and could induce important differences in exchange ratios.

Practical implications

The model is fully applicable, also in the presence of embedded real options such as minimum guarantees, but requires the volatility of the underlying.


The paper should be useful under both a managerial and a theoretical use in order to evaluate stochastic exchange ratios.



Giacomello, B. (2008), "Exchange ratios in a merger with stochastic capital reserves: fair valuation and embedded options", Managerial Finance, Vol. 34 No. 4, pp. 239-251.



Emerald Group Publishing Limited

Copyright © 2008, Emerald Group Publishing Limited

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