Underlying Asset Price (underlying + asset_price)

Distribution by Scientific Domains

Selected Abstracts

Transform Analysis and Asset Pricing for Affine Jump-diffusions

ECONOMETRICA, Issue 6 2000
Darrell Duffie
In the setting of ,affine' jump-diffusion state processes, this paper provides an analytical treatment of a class of transforms, including various Laplace and Fourier transforms as special cases, that allow an analytical treatment of a range of valuation and econometric problems. Example applications include fixed-income pricing models, with a role for intensity-based models of default, as well as a wide range of option-pricing applications. An illustrative example examines the implications of stochastic volatility and jumps for option valuation. This example highlights the impact on option ,smirks' of the joint distribution of jumps in volatility and jumps in the underlying asset price, through both jump amplitude as well as jump timing. [source]

Expected Time Value Decay of Options: Implications for Put-Rolling Strategies

George F. Tannous
G11; G12; G19; D46 Abstract Assuming the underlying asset price remains constant, previous studies show that the time value of an option decays gradually at a rate that accelerates over time and peaks at the expiration date. Thus, a significant portion of time value is lost in the four weeks leading up to expiration. This paper shows the time value of currently at- or near-the-money options should be expected to decay at a rate that decreases over time. The time values of options that are currently deep-in- or deep-out-of-the-money are expected to initially rise and then resume the normal decay pattern. [source]

A Generalization of the Brennan,Rubinstein Approach for the Pricing of Derivatives

António Câmara
This paper derives preference-free option pricing equations in a discrete time economy where asset returns have continuous distributions. There is a representative agent who has risk preferences with an exponential representation. Aggregate wealth and the underlying asset price have transformed normal distributions which may or may not belong to the same family of distributions. Those pricing results are particularly valuable (a) to show new sufficient conditions for existing risk-neutral option pricing equations (e.g., the Black,Scholes model), and (b) to obtain new analytical solutions for the price of European-style contingent claims when the underlying asset has a transformed normal distribution (e.g., a negatively skew lognormal distribution). [source]

Does informed trading occur in the options market?

Some revealing clues
G13; G14; C22 Abstract This paper analyses the relationship between proxy variables for informed trading in the options market and a set of exogenous news variables. The aim was to test directly for the presence or absence of informed trading in the options market and for the possible impact of this trading on underlying asset prices. Our findings reveal that potential informed trading in options markets is channelled basically through out-of-the-money options, except for volatility trading which mainly involves at-the-money options because of their liquidity. In both cases, we have found evidence in favour of investors' strategic fragmentation of transactions into intermediate size trades (stealth trading). Finally, it is shown that lack of consensus among agents also generates increased trading, particularly in out-of-the-money and at-the-money options. [source]

Analytic approximation formulae for pricing forward-starting Asian options

Chueh-Yung Tsao
In this article we first identify a missing term in the Bouaziz, Briys, and Crouhy (1994) pricing formula for forward-starting Asian options and derive the correct one. First, illustrate in certain cases that the missing term in their pricing formula could induce large pricing errors or unreasonable option prices. Second, we derive new analytic approximation formulae for valuing forward-starting Asian options by adding the second-order term in the Taylor series. We show that our formulae can accurately value forward-starting Asian options with a large underlying asset's volatility or a longer time window for the average of the underlying asset prices, whereas the pricing errors for these options with the previously mentioned formula could be large. Third, we derive the hedge ratios for these options and compare their properties with those of plain vanilla options. © 2003 Wiley Periodicals, Inc. Jrl Fut Mark 23:487,516, 2003 [source]

The quality of volatility traded on the over-the-counter currency market: A multiple horizons study

Vicentiu Covrig
Previous studies of the quality of market-forecasted volatility have used the volatility that is implied by exchange-traded option prices. The use of implied volatility in estimating the market view of future volatility has suffered from variable measurement errors, such as the non-synchronization of option and underlying asset prices, the expiration-day effect, and the volatility smile effect. This study circumvents these problems by using the quoted implied volatility from the over-the-counter (OTC) currency option market, in which traders quote prices in terms of volatility. Furthermore, the OTC currency options have daily quotes for standard maturities, which allows the study to look at the market's ability to forecast future volatility for different horizons. The study finds that quoted implied volatility subsumes the information content of historically based forecasts at shorter horizons, and the former is as good as the latter at longer horizons. These results are consistent with the argument that measurement errors have a substantial effect on the implied volatility estimator and the quality of the inferences that are based on it. © 2003 Wiley Periodicals, Inc. Jrl Fut Mark 23:261,285, 2003 [source]