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Options Premiums (option + premium)

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Business, Economics, Finance and Accounting100%

Selected Abstracts

Put Option Premiums and Coherent Risk Measures

MATHEMATICAL FINANCE, Issue 2 2002
Robert Jarrow
This note defines the premium of a put option on the firm as a measure of insolvency risk. The put premium is not a coherent risk measure as defined by Artzner et al. (1999). It satisfies all the axioms for a coherent risk measure except one, the translation invariance axiom. However, it satisfies a weakened version of the translation invariance axiom that we label translation monotonicity. The put premium risk measure generates an acceptance set that satisfies the regularity Axioms 2.1,2.4 of Artzner et al. (1999). In fact, this is a general result for any risk measure satisfying the same risk measure axioms as the put premium. Finally, the coherent risk measure generated by the put premium's acceptance set is the minimal capital required to protect the firm against insolvency uniformly across all states of nature. [source]

Step-reset options: Design and valuation

THE JOURNAL OF FUTURES MARKETS, Issue 2 2002
L. Paul Hsueh
This study proposes a new design of reset options in which the option's exercise price adjusts gradually, based on the amount of time the underlying spent beyond prespecified reset levels. Relative to standard reset options, a step-reset design offers several desirable properties. First of all, it demands a lower option premium but preserves the same desirable reset attribute that appeals to market investors. Second, it overcomes the disturbing problem of delta jump as exhibited in standard reset option, and thus greatly reduces the difficulties in risk management for reset option sellers who hedge dynamically. Moreover, the step-reset feature makes the option more robust against short-term price movements of the underlying and removes the pressure of price manipulation often associated with standard reset options. To value this innovative option product, we develop a tree-based valuation algorithm in this study. Specifically, we parameterize the trinomial tree model to correctly account for the discrete nature of reset monitoring. The use of lattice model gives us the flexibility to price step-reset options with American exercise right. Finally, to accommodate the path-dependent exercise price, we introduce a state-to-state recursive pricing procedure to properly capture the path-dependent step-reset effect and enhance computational efficiency. © 2002 John Wiley & Sons, Inc. Jrl Fut Mark 22:155,171, 2002 [source]

Price discovery in the options markets: An application of put-call parity

THE JOURNAL OF FUTURES MARKETS, Issue 4 2008
Wen-Liang G. Hsieh
This study investigates the relative rate of price discovery in Taiwan between index futures and index options, proposing a put-call parity (PCP) approach to recover the spot index embedded in the options premiums. The PCP approach offers the benefits of reducing model risk and alleviating the burden of volatility estimation. Consistent with the trading-cost hypothesis, a dominant tendency is found for futures and a subordinate but non-trivial price discovery from options. The relative weight of options price discovery is sensitive to the methodology employed as the means of inferring the option-implicit spot price. The empirical evidence suggests that the information contained in the PCP-implied spot encompasses that provided by the Black-Scholes-implied spot. © 2008 Wiley Periodicals, Inc. Jrl Fut Mark 28:354, 375, 2008 [source]

Net buying pressure, volatility smile, and abnormal profit of Hang Seng Index options

THE JOURNAL OF FUTURES MARKETS, Issue 12 2004
Kam C. Chan
We use the net buying pressure hypothesis of N. P. B. Bollen and R. Whaley (2004) to examine the implied volatilities, options premiums, and options trading profits at various time-intervals across five different moneyness categories of Hong Kong Hang Seng Index (HSI) options. The results show that the hypothesis can well describe the newly developed Hong Kong index options markets. The abnormal trading profits by selling out-of-the-money puts with delta hedge are statistically and economically significant across all options maturities. The findings are robust with or without outlier adjustment. Moreover, we provide two insights about the hypothesis. First, net buying pressure is attributed to hedging activities. Second, the net buying pressure on calls is much weaker than that on put options. © 2004 Wiley Periodicals, Inc. Jrl Fut Mark 24:1165,1194, 2004 [source]