Modem option pricing theory was developed in the late sixties and early seventies by F. Black, R. C. Merton and M. Scholes as an analytical tool for pricing and hedging option contracts and over-the-counter warrants. However, already in the seminal paper by Black and Scholes, the applicability of the model was regarded as much broader. In the second part of their paper, the authors demonstrated that a levered firm's equity can be regarded as an option on the value of the firm, and thus can be priced by option valuation techniques. A year later, Merton showed how the default risk structure of corporate bonds can be determined by option pricing techniques. Option pricing models are now used to price virtually the full range of financial instruments and financial guarantees such as deposit insurance and collateral, and to quantify the associated risks. Over the years, option pricing has evolved from a set of specific models to a general analytical framework for analyzing the production process of financial contracts and their function in the financial intermediation process in a continuous time framework. However, virtually no attempt has been made in the literature to integrate game theory aspects, i. e. strategic financial decisions of the agents, into the continuous time framework. This is the unique contribution of the thesis of Dr. Alexandre Ziegler. Benefiting from the analytical tractability of continuous time models and the closed form valuation models for derivatives, Dr.

Methodological Issues.- Introduction.- Game Theory Basics: Backward Induction and Subgame Perfection.- Option Pricing Basics: The General Contingent Claim Equation.- The Method of Game Theory Analysis of Options.- An Example: Determining the Price of a Perpetual Put Option.- Outline of the Book.- Credit and Collateral.- Introduction.- The Risk-Shifting Problem.- The Observability Problem.- Conclusion.- Endogenous Bankruptcy and Capital Structure.- Introduction.- The Model.- The Value of the Firm and its Securities.- The Effect of Capital Structure on the Firm`s Bankruptcy Decision.- The Investment Decision.- The Financing Decision.- An Incentive Contract.- Extensions of the Model.- Conclusion.- Junior Debt.- Introduction.- The Model.- The Value of the Firm and its Securities.- The Equity Holders` Optimal Bankruptcy Choice.- The Firm`s Decision to Issue Junior Claims.- The Influence of Junior Debt on the Value of Senior Debt.- Conclusion.- Bank Runs.- Introduction.- The Model.- The Incentive to Start a Run.- A Preliminary Condition for the Existence of Banks.- Valuing the Bank`s Equity.- The Shareholders` Recapitalization Decision.- The Bank`s Investment Incentives when Bank Runs are Possible.- The Bank`s Funding Decision.- A Note on the Equilibrium Deposit Spread.- Conclusion.- Deposit Insurance.- Introduction.- The Model.- Valuing Deposit Insurance, Bank Equity and Social Welfare.- The Guarantor`s Liquidation Strategy and Social Welfare.- The Incentive Effects of Deposit Insurance.- Deposit Insurance when there are Liquidation Delays.- Deposit Insurance with Unobservable Asset Value.- Conclusion.- Summary and Conclusions.