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Author: SingRu Hoe Publisher: ISBN: 9780542722721 Category : Economics Languages : en Pages :
Book Description
The first study explores optimal investment policies for strategic option exercise when the underlying project is not traded. A duopoly model captures strategic interactions, while a partial spanning asset models market incompleteness. The option value to invest is obtained through indifference pricing, i.e., certainty equivalent value. I find that incompleteness narrows the gap between leader and follower entry dates. The follower enters much sooner, and the leader delays slightly compared to classic real options models. Modeling investment income stream as an Arithmetic Brownian motion is a better fit than Geometric Brownian motion, while reducing the necessary numerical approximations for obtaining the results in the incomplete market situation. As a byproduct of modeling two different stochastic income streams, I investigate the impact of market share and uncertainty on the relative investment trigger as well as the option value to invest. Results are sensitive to these factors; thus, it is important to model stochastic processes to accurately reflect the real world circumstances. The second study explores the valuation consequences of incompleteness resulting from stochastic volatility in a real options setting. The optimal policy is obtained through q-optimal measures as well as indifference pricing. I examine the efficacy of different approaches to finding and justifying a particular martingale measure. Stochastic volatility induced market incompleteness affects the investment/abandonment decision in several important ways. In addition, I demonstrate that indifference prices for the option value to invest and the abandonment option solve quasilinear variational inequalities with obstacle terms. With the exponential utility function, the utility-based indifference price admits a new pricing measure, which is the minimal relative entropy martingale measure minimizing the relative entropy between the historical measure and the Q martingale measure. I also show that the indifference price is non-increasing with respect to risk aversion. As the risk aversion parameter converges to zero, the indifference price converges to the unique bounded viscosity solution of the linear variational inequality with obstacle term.
Author: SingRu Hoe Publisher: ISBN: 9780542722721 Category : Economics Languages : en Pages :
Book Description
The first study explores optimal investment policies for strategic option exercise when the underlying project is not traded. A duopoly model captures strategic interactions, while a partial spanning asset models market incompleteness. The option value to invest is obtained through indifference pricing, i.e., certainty equivalent value. I find that incompleteness narrows the gap between leader and follower entry dates. The follower enters much sooner, and the leader delays slightly compared to classic real options models. Modeling investment income stream as an Arithmetic Brownian motion is a better fit than Geometric Brownian motion, while reducing the necessary numerical approximations for obtaining the results in the incomplete market situation. As a byproduct of modeling two different stochastic income streams, I investigate the impact of market share and uncertainty on the relative investment trigger as well as the option value to invest. Results are sensitive to these factors; thus, it is important to model stochastic processes to accurately reflect the real world circumstances. The second study explores the valuation consequences of incompleteness resulting from stochastic volatility in a real options setting. The optimal policy is obtained through q-optimal measures as well as indifference pricing. I examine the efficacy of different approaches to finding and justifying a particular martingale measure. Stochastic volatility induced market incompleteness affects the investment/abandonment decision in several important ways. In addition, I demonstrate that indifference prices for the option value to invest and the abandonment option solve quasilinear variational inequalities with obstacle terms. With the exponential utility function, the utility-based indifference price admits a new pricing measure, which is the minimal relative entropy martingale measure minimizing the relative entropy between the historical measure and the Q martingale measure. I also show that the indifference price is non-increasing with respect to risk aversion. As the risk aversion parameter converges to zero, the indifference price converges to the unique bounded viscosity solution of the linear variational inequality with obstacle term.
Author: Oana Floroiu Publisher: ISBN: Category : Languages : en Pages : 23
Book Description
This paper reconsiders the predictions of the standard option pricing models in the context of incomplete markets. We relax the completeness assumption of the Black-Scholes (1973) model and as an immediate consequence we can no longer construct a replicating portfolio to price the option. Instead, we use the good-deal bounds technique to arrive at closed-form solutions for the option price. We determine an upper and a lower bound for this price and find that, contrary to Black-Scholes (1973) options theory, increasing the volatility of the underlying asset does not necessarily increase the option value. In fact, the lower bound prices are always a decreasing function of the volatility of the underlying asset, which cannot be explained by a Black-Scholes (1973) type of argument. In contrast, this is consistent with the presence of unhedgeable risk in the incomplete market. Furthermore, in an incomplete market where the underlying asset of an option is either infrequently traded or non-traded, early exercise of an American call option becomes possible at the lower bound, because the economic agent wants to lock in value before it disappears as a result of increased unhedgeable risk.
Author: Kin Keung Lai Publisher: Routledge ISBN: 1135006989 Category : Business & Economics Languages : en Pages : 113
Book Description
This book provides different financial models based on options to predict underlying asset price and design the risk hedging strategies. Authors of the book have made theoretical innovation to these models to enable the models to be applicable to real market. The book also introduces risk management and hedging strategies based on different criterions. These strategies provide practical guide for real option trading. This book studies the classical stochastic volatility and deterministic volatility models. For the former, the classical Heston model is integrated with volatility term structure. The correlation of Heston model is considered to be variable. For the latter, the local volatility model is improved from experience of financial practice. The improved local volatility surface is then used for price forecasting. VaR and CVaR are employed as standard criterions for risk management. The options trading strategies are also designed combining different types of options and they have been proven to be profitable in real market. This book is a combination of theory and practice. Users will find the applications of these financial models in real market to be effective and efficient.
Author: Richard Lehman Publisher: John Wiley & Sons ISBN: 1118022262 Category : Business & Economics Languages : en Pages : 224
Book Description
Practical option strategies for the new post-crisis financial market Traditional buy-and-hold investing has been seriously challenged in the wake of the recent financial crisis. With economic and market uncertainty at a very high level, options are still the most effective tool available for managing volatility and downside risk, yet they remain widely underutilized by individuals and investment managers. In Options for Volatile Markets, Richard Lehman and Lawrence McMillan provide you with specific strategies to lower portfolio volatility, bulletproof your portfolio against any catastrophe, and tailor your investments to the precise level of risk you are comfortable with. While the core strategy of this new edition remains covered call writing, the authors expand into more comprehensive option strategies that offer deeper downside protection or even allow investors to capitalize on market or individual stock volatility. In addition, they discuss new offerings like weekly expirations and options on ETFs. For investors who are looking to capitalize on global investment opportunities but are fearful of lurking "black swans", this book shows how ETFs and options can be utilized to construct portfolios that are continuously protected against unforeseen calamities. A complete guide to the increased control and lowered risk covered call writing offers active investors and traders Addresses the changing investment environment and how to use options to succeed within it Explains how to use options with exchange-traded funds Understanding options is now more important than ever, and with Options for Volatile Markets as your guide, you'll quickly learn how to use them to protect your portfolio as well as improve its overall performance.
Author: Sasha Ferdinand Stoikov Publisher: ISBN: Category : Languages : en Pages : 288
Book Description
This thesis analyzes the optimal strategies of rational agents in incomplete financial markets. The incompleteness may arise from the stochastic volatility of stock prices, in which case we study the optimal pricing and hedging strategies of an option trader. We introduce a new concept that we call the relative indifference price, which is the price at which a trader is indifferent to trade in an additional option, given that he is currently holding and dynamically hedging a portfolio of options. We find that the appropriate volatility risk premium depends on the trader's risk aversion coeffcient and his portfolio position before selling or buying the additional option. More generally, the incompleteness of the market may arise from both the drift and volatility of the stock being driven by a correlated factor. In this setting, we study the optimal consumption and investment policies of CARA, conservative CRRA and aggressive CRRA agents. In particular, we provide interpretations of the non-myopic investment in terms of martingale measures and the risk monitoring strategy of a path-dependent option.
Author: Tim Leung Publisher: ISBN: Category : Languages : en Pages : 13
Book Description
Investors often control risk exposure by trading options. This article studies the optimal strategy for liquidating an option position. Under both complete and incomplete market settings, we quantify the value of optimally timing to liquidate, and identify the situations where it is optimal to hold the option position through expiration. Numerical illustration of the non-trivial liquidation timing is provided for the cases of a straddle and a butterfly, along with a sensitivity analysis on the drift of the underlying stock. We also give an overview of option liquidation in incomplete markets with stochastic volatility.
Author: John C. Cox Publisher: Prentice Hall ISBN: Category : Business & Economics Languages : en Pages : 518
Book Description
Includes the first published detailed description of option exchange operations, the first published treatment using only elementary mathematics and the first step-by-step procedure for implementing the Black-Scholes formula in actual trading.
Author: SingRu Hoe
Author: SingRu Hoe
Author: Oana Floroiu
Author: Kin Keung Lai
Author: Richard Lehman
Author: L. C. G. Rogers
Author: 
Author: Sasha Ferdinand Stoikov
Author: Tim Leung
Author: John C. Cox
Author: Sankarshan Acharya