The Optimality of Call Provision Terms

Abstract

There is substantial variation in fixed-price call provision terms—call price premium and call protection. I investigate determinants of call price, call protection, and estimated call option value. Consistent with agency theory and asymmetric information models, I find that lower credit quality and opaque issuers choose higher call premiums, longer call protection, and overall less valuable call options. Higher-quality issuers, particularly financial institutions that struggle when interest rates are low, do the opposite. This paper was accepted by David Simchi-Levi, finance.