valuation of foreign currency options some empirical tests this paper investigates the efficiency of the market for foreign currency options with the help of a modified version of the black scholes model the evidence in the ex post tests is inconsistent with this hypothesis since we find a large number of opportunities for abnormal profits a second set of tests is conducted on an ex ante basis to determine whether these profit opportunities exist even if the execution of the strategy is delayed by one day the evidence from these tests provides more support for the hypothesis of market efficiency

the valuation of american options with stochastic interest rates a generalization of the geske johnson technique the geske johnson approach provides an efficient and intuitively appealing technique for the valuation and hedging of american style contingent claims here we generalize their approach to a stochastic interest rate economy the method is implemented using options exercisable on one of a finite number of dates we illustrate how the value of an american style option increases with interest rate volatility the magnitude of this effect depends on the extent to which the option is in the money the volatilities of the underlying asset and the interest rates as well as the correlation between them

50th anniversary article option pricing valuation models and applications this paper surveys the literature on option pricing from its origins to the present an extensive review of valuation methods for european and american style claims is provided applications to complex securities and numerical methods are surveyed emphasis is placed on recent trends and developments in methodology and modeling

the economic effects of land registration on smallholder farms in kenya evidence from nyeri and kakamega districts effects of land registration and title on security of tenure use of formal credit crop yields and land concentration are analyzed from household and plot data in four kenyan sites results indicate that the registration and titling program had a weak impact on perceived land rights of farmers credit use and terms crop yields or concentration of land holdings the conclusion is that titles are acquired for enhancing security of rights rather than for increasing agricultural production scarce government resources are best targeted towards providing better infrastructure and market opportunities which should also foster a greater demand for titling

the early exercise of american puts abstract this paper shows that american puts on dividend paying stocks are most likely to be exercised either just after an ex dividend date or just prior to expiration at any other time the option to exercise an american put early may have less value thus put writers and converters can predict when protection against premature exercise will be most valuable the probability of early exercise is shown to be sensitive to managerial policy regarding the suspension of dividend payments transaction costs and interest rates however dividend payments are demonstrated to be the primary deterrent to early exercise

an empirical test of a valuation model for american options on futures contracts pricing models for american call and put options on futures contracts are derived herein these models are used to investigate the efficiency of the market for options on standard poor 500 and german mark futures the evidence presented here indicates that market prices for these options deviate substantially from their corresponding model prices in addition it is shown that a hedging strategy originated at prices that indicate a deviation of market from model is successful in translating the observed mispricing into excess profits after transactions costs however these net profits are eliminated if the origination of the strategy is delayed by one trade or if bid ask spreads are accounted for

static hedging of exotic options this paper develops static hedges for several exotic options using standard options the method relies on a relationship between european puts and calls with different strike prices the analysis allows for constant volatility or for volatility smiles or frowns

the value of the option to wait and see abstract this note shows a very simple way to incorporate the effects of uncertainty about the accuracy of present value estimates into the firm s option to delay irreversible investment it is shown that if the firm s priors about the distribution of present value are sufficiently diffuse a reduction in the accuracy of present value estimates will increase the value of delay while learning will reduce its value

tenure security and urban squatting while recent studies have shown that up to 35 of the total urban population of the third world live in squatter settlements there is a dearth of economic analysis on the phenomenon of squatting this paper attempts to fill this gap the equilibrium model argues that the difference in unit housing prices between the non squatting formal sector of a city and its squatting informal sector reflects the premium associated with a secure tenure status the empirical portion of this paper uses hedonic price techniques to derive the average premium on tenure security in a medium sized philippine city davao results show that formal sector unit dwelling prices are about 18 renters to 58 owners more than in the informal sector these equilibrium price differentials were found to be greater for lower income groups larger household sizes and households with older heads for renters and younger heads for

the american put option valued analytically an analytic solution to the american put problem is derived herein the hedge ratio and other derivatives of the solution are presented the formula derived implies an exact duplicating portfolio for the american put consisting of discount bonds and stock sold short the formula is extended to consider put options on stocks paying cash dividends a polynomial expression is developed for evaluating these formulae values and hedge ratios for puts on both dividend and nondividend paying stocks are calculated tabulated and compared with values derived by numerical integration and binomial approximation as with european options evaluating an analytic formula is more efficient than approximating the stock price process or the partial differential equation by binomial or finite difference methods finally applications of this american put solution are discussed

the valuation of sequential exchange opportunities sequential exchange opportunities are valued using the techniques of modern option pricing theory the vehicle for analysis is the concept of a compound exchange option this security is shown to exist implicitly in several contractual settings a valuation formula for this option is derived the formula is shown to generalize much previous work in option pricing several applications of the formula are presented

the accelerated binomial option pricing model this paper describes the application of a convergence acceleration technique to the binomial option pricing model the resulting model termed the accelerated binomial option pricing model also can be viewed as an approximation to the geske johnson model for the value of the american put the new model is accurate and faster than the conventional binomial model it is applicable to a wide range of option pricing problems

an empirical investigation of the market for comex gold futures options option pricing models that assume a constant interest rate may misprice futures options if the interest rate fluctuates significantly or if the price of the underlying asset is correlated with the interest rate the futures option pricing model of ramaswamy and sundaresan allows for a stochastic interest rate and correlation of the underlying asset s price with the interest rate using a data set of daily closing prices for comex gold futures options this paper tests the ramaswamy and sundaresan model against a constant interest rate model results indicate that the stochastic interest rate model is a superior predictor of market prices the past several years have witnessed many innovations in contingentclaims markets the introduction of gold futures options by the commodity exchange of new york comex in october 1982 has proven particularly successful volume and open interest have been large and growing the combination of futures and futures options trading makes comex the principal market for gold in north america the existence of gold futures options represents a dual challenge to conventional option pricing models first the variability of interest rates affects futures prices and thus the value of futures options second if the price of gold is correlated with inflation or the real interest rate it will also be correlated with the nominal interest rate option pricing models that assume that the nominal rate is constant will misprice gold futures options if these factors are significant this paper tests whether market prices for gold futures options are best described by an alternative model that allows the price of gold to covary with the rate of interest section i describes comex gold contracts and notes differences between futures option contracts and stock option contracts which have been studied more extensively section ii describes the data set of market prices that has been collected and tests for violations of boundaries by the prices section iii describes and tests the competing option valuation models section iv is a summary and conclusion

the valuation of american options on bonds abstract we value american options on bonds using a generalization of the geske johnson geske r johnson h 1984 journal of finance 39 1151 1542 gj technique the method requires the valuation of european options and options with multiple exercise dates it is shown that a risk neutral valuation relationship rnvr along the lines of black scholes black f scholes m 1973 journal of political economy 81 637 659 model holds for options exercisable on multiple dates even under stochastic interest rates when the price of the underlying asset is lognormally distributed the proposed computational procedure uses the maximized value of these options where the maximization is over all possible exercise dates the value of the american option is then computed by richardson extrapolation the volatility of the underlying default free bond is modeled using a two factor model with a short term and a long term interest rate factor we report the results of simulations of american option values using our method and show how they vary with the key parameter inputs such as the maturity of the bond its volatility and the option strike price

monte carlo methods for security pricing the monte carlo approach has proved to be a valuable and flexible computational tool in modern finance this paper discusses some of the recent applications of the monte carlo method to security pricing problems with emphasis on improvements in efficiency we first review some variance reduction methods that have proved useful in finance then we describe the use of deterministic low discrepancy sequences also known as quasi monte carlo methods for the valuation of complex derivative securities we summarize some recent applications of the monte carlo method to the estimation of partial derivatives or risk sensitivities and to the valuation of american options we conclude by mentioning other applications

the analytic valuation of american options no analytic solutions exists for the valuation of american options written on futures contracts and foreign currencies for which early exercise may be optimal this article formulates the american option valuation problem in economically and mathematically meaningful ways this enables us to derive valuation formulas for american options the properties associated with the optimal exercise boundary are examined and a numerical technique to implement the valuation formulas is presented article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

valuing modularity as a real option we provide a general valuation approach for capital budgeting decisions involving the modularization in the design of a system within the framework developed by baldwin and clark baldwin c y k b clark 2000 design rules the power of modularity mit press cambridge ma we implement a valuation approach using a numerical procedure based on the least squares monte carlo method proposed by longstaff and schwartz longstaff f a e s schwartz 2001 valuing american options by simulation a simple least squares approach rev financial stud 14 1 113 147 the approach is accurate general and flexible

on the market risk involved in the public financial system in japan a theoretical and numerical investigation abstract treating the postal savings system and the fiscal investments and loans program in japan as an integrated financial institution this paper analyzes the market risk involved in this system for this purpose the paper pays particular attention to options embedded in both assets and liabilities this paper finds that 1 the current rule for determining interest rates on the postal savings account well reflects the values of the embedded put options and 2 due to the flexible options the system tends to entail high market risks in particular as spot rates go up the duration of liabilities becomes extremely short with anticipation of early withdrawal

the use of the control variate technique in option pricing this paper presents a generalized version of the lattice approach to pricing options it shows how the control variate technique can produce significant improvements in the effi ciency ofthe approach the control variate technique is illustrated using american puts on dividend and nondividend paying stocks

pricing and static hedging of american style options under the jump to default extended cev model abstract this paper prices and hedges american style options through the static hedge approach shp proposed by chung and shih 2009 and extends the literature in two directions first the shp approach is generalized to the jump to default extended cev jdcev model of carr and linetsky 2006 and plain vanilla american style options on defaultable equity are priced the robustness and efficiency of the proposed pricing solutions are compared with the optimal stopping approach offered by nunes 2009 under both the jdcev framework and the nested constant elasticity of variance cev model of cox 1975 using different elasticity parameter values second the early exercise boundary near expiration is derived under the jdcev model

the pricing of futures and options contracts on the value line index this paper considers the problems peculiar to the value line index because of its use of geometric averaging as regards the pricing of options and futures on that index the value line composite index vlci is an equally weighted geometric average index of nearly 1700 stocks the vlci futures market has existed since 1982 while the vlci options market was established in 1985 this paper provides valuation formulas and analyzes the economic properties of these contracts because of the geometric averaging in the vlci its contingent claims have special properties for example the futures price may fall short of the spot price and the value of a vlci call option may decline when the volatility of the index is increased vlci futures are shown to provide a direct means for duplicating an equally weighted portfolio of the underlying stocks the value line composite index vlci is an unweighted geometric average of stock prices expressed in index form the index on june 30 1961 was set at 100 and subsequent values are compared against it futures contracts on the vlci are traded on the kansas city board of trade kcbt they were the first stock index futures to be traded in the united states starting on february 24 1982 unlike commodity futures contracts no delivery ever takes place instead any open contracts on expiration day are settled in cash according to the actual vlci value 1 more recent market innovations are options on the vlci that have been traded on the philadelphia stock exchange pse since january

continuous time methods in finance a review and an assessment i survey and assess the development of continuous time methods in finance during the last 30 years the subperiod 1969 to 1980 saw a dizzying pace of development with seminal ideas in derivatives securities pricing term structure theory asset pricing and optimal consumption and portfolio choices during the period 1981 to 1999 the theory has been extended and modified to better explain empirical regularities in various subfields of finance this latter subperiod has seen significant progress in econometric theory computational and estimation methods to test and implement continuous time models capital market frictions and bargaining issues are being increasingly incorporated in continuous time theory the roots of modern continuous time methods in finance can be traced back to the seminal contributions of merton 1969 1971 1973b in the late 1960s and early 1970s merton 1969 pioneered the use of continuous time modeling in financial economics by formulating the intertemporal consumption and portfolio choice problem of an investor in a stochastic dynamic programming setting merton 1973b also showed how such a framework can be used to develop equilibrium asset pricing implications thereby significantly extending the asset pricing theory to richer dynamic settings and expanding the scope of applications of continuous time methods to study problems in financial economics 1 within a span of about 30 years from the publication of merton s inf luential papers continuous time methods have become an integral part of financial economics indeed in certain core areas in finance such as e g asset pricing derivatives valuation term structure theory and portfolio selection continuoustime methods have proved to be the most attractive way to conduct research and gain economic intuition the continuous time approach in these areas has produced models with a rich variety of testable implications the econometric theory for testing continuous time models has made rapid strides in the last decade and has thus kept pace with the impressive progress on the theoretical front one hopes that the actual empirical investigations and estimation using the new procedures will follow suit soon

hedging using simulation a least squares approach abstract this paper presents a new and flexible computational approach to derivative hedging it is based on the use of least squares regression in order to compute the hedging portfolio this nonparametric methodology can be readily applied to any derivative contract written on a single underlying risky asset in a complete market with continuous markov price paths we illustrate this technique computing sensitivities on plain vanilla and exotic options with both european and american exercise style the achieved numerical accuracy is always comparable with the best simulation and semianalytic techniques presented in the literature

valuation of capped variable rate loan commitments abstract the early exercise of capped variable rate loan commitments is formalized as the first passage time to a critical boundary in a compound option model as early exercised commitment puts are american style options numerical procedures are used to obtain simulated values it appears from the latter that the value of the early exercise premium is nontrivial and increasing with the terms to option expiry put values are also sensitive to the volatility of credit market rates as these affect the variance of the borrower s indebtedness value

monte carlo valuation of american options through computation of the optimal exercise frontier this paper introduces a monte carlo simulation method for pricing multidimensional american options based on the computation of the optimal exercise frontier we consider bermudan options that can be exercised at a finite number of times and compute the optimal exercise frontier recursively we show that for every date of possible exercise any single point of the optimal exercise frontier is a fixed point of a simple algorithm once the frontier is computed we use plain vanilla monte carlo simulation to price the option and obtain a low biased estimator we illustrate the method with applications to several types of options

hedging the risks from writing foreign currency options abstract this paper considers the ways in which banks and other financial institutions can hedge their risks when they write non exchange traded foreign currency options key factors affecting the performance of delta hedging are identified and hedging schemes involving the use of exchange traded options are analyzed the schemes are tested using both simulated data and data from trades on the philadelphia exchange between february 1983 and september 1984

market making in the options markets and the costs of discrete hedge rebalancing in this paper we provide empirical evidence consistent with the hypothesis that options market makers face risks in managing inventory that are unique to the options markets in particular we show that risks associated with the inability to rebalance an option position continuously and uncertainty about the return volatility of the underlying stock each account for a statistically and economically significant proportion of the bid ask spreads quoted for a sample of chicago board options exchange options it is widely recognized that securities dealers face risk associated with inventory positions taken in the course of their trading activities for the equity dealer this has been shown both theoretically e g stoll 1978a ho and stoll 1983 and empirically e g stoll 1978b to depend on the stock s return volatility and the expected duration of the risk exposure in this paper we recognize that option dealers face an additional dimension of risk as a result of the option s stochastic return volatility and demonstrate that this option characteristic contributes to the cost of liquidity in the options market ho and stoll 1983 show that if the stock return volatility is constant the specialist s risk exposure per dollar of investment is nonstochastic over the interval during which the inventory is held in contrast unless the option dealer is able to trade continuously an option transaction s contribution to the dealer s risk exposure will be stochastic since the volatility of an option is a function of both its stochastic hedge ratio as well as the underlying stock s return volatility the problem that arises is particularly clear in the context of a dealer attempting to maintain a delta neutral exposure a strategy common among market makers in the options markets imagine a market maker who simultaneously buys 10 option contracts with a hedge ratio of 1 4 and sells 5

pricing american style securities using simulation abstract we develop a simulation algorithm for estimating the prices of american style securities i e securities with opportunities for early exercise our algorithm provides both point estimates and error bounds for the true security price it generates two estimates one biased high and one biased low both asymptotically unbiased and converging to the true price combining the two estimators yields a confidence interval for the true price the proposed algorithm is especially attractive compared with lattice and finite difference methods when there are multiple state variables and a small number of exercise opportunities preliminary computational evidence is given

an inverse finite element method for pricing american options abstract the pricing of american options has been widely acknowledged as a much more intriguing problem in financial engineering in this paper a convergency proved ife inverse finite element approach is introduced to the field of financial engineering to price american options for the first time without involving any linearization process at all the current approach deals with the nonlinearity of the pricing problem through an inverse approach numerical results show that the ife approach is quite accurate and efficient and can be easily extended to multi asset or stochastic volatility pricing problems the key contribution of this paper to the literature is that we have managed to provide a comprehensive convergence analysis for the ife approach including not only an error estimate of the adopted discrete scheme but also the convergence of the adopted iterative scheme which ensures that our numerical solution does indeed converge to the exact one of the original nonlinear system

how do oil producers respond to giant oil field discoveries abstract the classical hotelling model predicts that the optimal extraction level rises immediately after an unexpected resource discovery whereas in reality there are substantial adjustment costs in petroleum production and an average lag of several years between a discovery and the start of production using a large panel of country level production data and a difference in differences identification approach i show that domestic production levels respond before a newly found oil field comes on line and that this increase is driven by non opec producers consistent with different responses of opec and non opec drilling activity offshore fields and exceptionally large super or mega giant fields are also more likely to raise country level production given that domestic petroleum consumption rises by less in response to a discovery at least part of the increase in production seems to go into net oil exports

pricing and exercising american options an asymptotic expansion approach abstract this paper proposes and implements a novel asymptotic expansion approach for pricing discretely monitored american options and approximating their optimal early exercise boundaries under a generic class of multivariate derivative pricing models incorporating both stochastic volatility and levy driven jumps in asset return the price and the critical value can be expanded up to any arbitrary order around those under a simple constant volatility jump diffusion model the expansion terms are then efficiently implemented by exactly solving some backward inductions via closed form fourier transforms where a substantial extension of the hilbert transform method of feng and linetsky 2008a 2009 plays an important role the efficiency of our method is illustrated through some representative examples as applications we analyze the impacts of various model parameters on the optimal early exercise boundary compare the optimal early exercise boundaries under different models and propose a derivative proxy based method for practically exercising american options under models with stochastic volatility and jumps

nonparametric estimation of american options exercise boundaries and call prices abstract unlike european type derivative securities there are no simple analytic valuation formulas for finite lived american options even when the underlying asset price has constant volatility the early exercise feature considerably complicates the valuation of american contracts the strategy taken in this paper is to rely on nonparametric statistical methods using market data to estimate the call prices and the exercise boundaries a comparison is made with parametric constant volatility model based prices and exercise boundaries the paper focuses on assessing the adequacy of conventional formulas by comparing them to nonparametric estimates we use daily market option prices and exercise data on the s p100 contract the most actively traded american option contract we find large discrepancies between the parametric and nonparametric call prices and exercise boundaries we also find remarkable similarities of the nonparametric estimates before and after the crash of october 1987

the saga of the american put abstract the american put is one of the oldest problems in mathematical finance we review the development of the relevant literature over the last 40 years today the mainstream computational problems have been solved satisfactorily and the target of research is shifting towards the development of further insights into the value of timing investment decisions

a moving boundary approach to american option pricing this paper describes a method to solve the free boundary problem that arises in the pricing of american options most numerical methods for american option pricing exploit the representation of the option price as the expected pay off under the risk neutral measure and calculate the price for a given time to expiration and stock price they do not solve the related free boundary problem explicitly the advantage of solving the free boundary problem is that it provides the entire price function as well as the optimal exercise boundary explicitly our approach which we term the moving boundary approach is based on using a boundary guess and the value associated with the guess to construct an improved boundary it is also shown that on iteration the sequence of boundaries converge monotonically to the optimal exercise boundary examples illustrating the convergence behavior as well as discussions providing insight into the method are also presented finally we compare runtimes and speeds with other methods that solve the free boundary problem and compute the optimal boundaries explicitly like the front fixing method penalty method method based on the integral representations and the method by brennan and schwartz 1977 the valuation of american put options journal of finance 32 2 449 462

a note on the convergence of binomial pricing and compound option models the binomial pricing model of cox ross and rubinstein 2 and the compound option model of geske 3 are both elegant and self contained frameworks for the valuation of american options and related contingent claims each providing us with a distinctive valuation procedure flexible enough to be adapted to a wide variety of problems for american type options on assets with a prices following a lognormal diffusion process and b a continuous time exercise policy such as put options on individual stocks calls and puts on foreign exchange and calls and puts on futures contracts the binomial pricing model approximates both the stochastic process and the exercise opportunity set the latter by restricting exercise to a discrete set of dates the compound option model on the other hand approximates only the exercise opportunity set however it pays for this with a high price in computational requirements specifically with n exercise dates allowed multivariate normal probabilities of every order up to and including n must be evaluated in their article on the valuation of put options geske and johnson 4 provide an ingenious solution to this problem by applying acceleration techniques common in numerical analysis but new to the finance literature letting t be the time to expiration of the option and p the value of a compound option with exercise permitted at the n uniformly spaced dates t n 2t n t they generate the sequence of compound option values p1 p2 pn polynomial extrapolation is then used to estimate p lim n x oo pn they found this procedure to be very accurate over a limited sample of put options with low values of n though not discussed by geske and johnson the reasons for the effectiveness of acceleration techniques in a compound option model are apparent from a cursory examination an acceleration technique will perform best when the approximating sequence converges uniformly on the true value of the contingent claim and worst when convergence includes complex and unpredictable oscilla

convergence and biases of monte carlo estimates of american option prices using a parametric exercise rule abstract this paper presents an algorithm for pricing american options using monte carlo simulation the method is based on using a parametric representation of the early exercise decision it is shown that as long as this parametric representation subsumes all relevant stopping times error bounds can be constructed using two different estimates one which is biased low and one which is biased high both are consistent and asymptotically unbiased estimators of the true option value results for high dimensional american options confirm the viability of the numerical procedure the convergence results of the paper shed light into the biases present in other algorithms proposed in the literature

an analytic approximation for the american put price black and scholes 1 derived the pricing equation for a european put when the stock price follows geometric brownian motion for this same case merton 5 derived the pricing equation for an american put with infinite time to maturity brennan and schwartz 2 rubinstein and cox 7 and parkinson 6 have developed numerical solutions for the price of an american put numerical solutions are expensive and do not provide much intuition naturally an analytic solution would be much preferred unfortunately pricing the american put requires solving a formidable and presumably intractable boundary value problem

review of de soto s the mystery of capital in the mystery of capital hernando de soto promotes his explanation of why formal capital markets function poorly in developing countries de soto argues that much of the population of developing countries lacks access to credit not because they lack assets but because ownership of their property is secured informally which prevents the use of property as collateral the inability to convert assets into capital keeps the developing world from benefiting from capitalism

universal option valuation using quadrature methods abstract this paper proposes and develops a novel simple widely applicable numerical approach for option pricing based on quadrature methods though in some ways similar to lattice or finite difference schemes it possesses exceptional accuracy and speed discretely monitored options are valued with only one timestep between observations and nodes can be perfectly placed in relation to discontinuities convergence is improved greatly in the extrapolated scheme a doubling of points can reduce error by a factor of 256 complex problems e g fixed strike lookback discrete barrier options can be evaluated accurately and orders of magnitude faster than by existing methods

the value of early exercise in option prices an empirical investigation previous studies in the valuation of american options apparently undervalue the right of early exercise this study uses actual prices from the cboe s s p 100 option instead of model generated values deviations from the theoretical put call parity relationship are caused by the possibility of early exercise these deviations are used to infer the value of early exercise the actual value of early exercise is both statistically and economically significant as expected from theoretical considerations the value of early exercise for put options is greater than for call options

an analytic approximation for the american put price for options on stocks with dividends in a recent paper johnson 7 has given an analytic approximation to the american put price that delivers values that are very close to numerical solutions the limitation to the johnson approximation is that it is only applicable to put options on stocks without cash dividends this study modifies the johnson approximation to value options on stocks that have one exdividend date prior to the option expiration date and these approximation values are compared to the analytic solutions provided by the geske and johnson 6 american put option pricing model the approximation values are generally very close to the analytic solutions

the american put option and its critical stock price we derive an expression for the critical stock price for the american put we start by expressing the put price as an integral involving first passage probabilities this approach yields intuition for merton s result for the perpetual put we then consider the finite lived case using 1 the fact that the put value ceases to depend on time when the critical stock price is reached and 2 the result that an american put equals a european put plus an early exercise premium we derive the critical stock price we approximate the critical stock price function to compute accurate put prices kim 1990 jacka 1991 and carr jarrow and myneni 1992 showed that the american put price is equal to the corresponding european put price plus an integral representing the early exercise premium however to use their approach one needs to know the critical stock price which may be defined in three equivalent ways 1 it is the value of the stock price at which one is indifferent between exercising and not exercising the put

property rights for the poor effects of land titling secure property rights are considered a key determinant of economic development the evaluation of the causal effects of property rights however is a difficult task as their allocation is typically endogenous to overcome this identification problem we exploit a natural experiment in the allocation of land titles in 1981 squatters occupied a piece of land in a poor suburban area of buenos aires in 1984 a law was passed expropriating the former owners land to entitle the occupants some original owners accepted the government compensation while others disputed the compensation payment in the slow argentine courts these different decisions by the former owners generated an exogenous allocation of property rights across squatters using data from two surveys performed in 2003 and 2007 we find that entitled families substantially increased housing investment reduced household size and enhanced the education of their children relative to the control group these effects however did not take place through improvements in access to credit our results suggest that land titling can be an important tool for poverty reduction albeit not through the shortcut of credit access but through the slow channel of increased physical and human capital investment which should help to reduce poverty in future generations

the valuation of american barrier options using the decomposition technique in this paper we propose an alternative approach for pricing and hedging american barrier options speci cally we obtain an analytic representation for the value and hedge parameters of barrier options using the decomposition technique of separating the european option value from the early exercise premium this allows us to identify some new put call symmetry relations and the homogeneity in price parameters of the optimal exercise boundary these properties can be utilized to increase the computational e ciency of our method in pricing and hedging american options our implementation of the obtained solution indicates that the proposed approach is both e cient and accurate in computing option values and option hedge parameters our numerical results also demonstrate that the approach dominates the existing lattice methods in both accuracy and e ciency in particular the method is free of the di culty that existing

discrete time continuous state interest rate models we show how to implement arbitrage free models of the short term interest rate in a discretetime setting that allows a continuum of rates at any particular date discrete time allows approximate pricing of interest rate contingent claims that cannot be valued in continuous time models it is usually associated with discrete states with possible interest rates restricted to a limited number of outcomes as in the lattice model of hull and white 1994 we develop a method for approximating the prices of contingent claims without that restriction we use numerical integration to evaluate the risk neutral expectations that define those prices and function approximation to efficiently summarize the information the procedure is simple and flexible we illustrate its properties in the extended vasicek model of hull and white and show it to be an effective alternative to lattice methods

valuation of american options on foreign currency abstract pricing models for american call and put options on foreign currency are derived herein these models are used to investigate the efficiency of the market for foreign currency options the evidence presented here indicates that market prices for these options deviate substantially from their corresponding model prices in addition it is shown that a hedging strategy executed at transaction prices can be used to translate an observed deviation of market from model prices into positive excess profits however these profits are eliminated if the strategy is executed at bid and offer prices

land titling and rural transition in vietnam abstract we examine the impact of the 1993 land law of vietnam which gave households the power to exchange transfer lease inherit and mortgage their land use rights we use household surveys before and after the law was passed together with the considerable variation across provinces in the speed of implementation of the reform to identify the impact of the law we find that the additional land rights led to statistically significant increases in the share of total area devoted to long term crops and in labor devoted to nonfarm activities however these changes are not large in magnitude and appear to be driven mainly by the increased security of tenure provided by the law rather than by increased access to credit markets or greater land market participation

optimal stopping and early exercise an eigenfunction expansion approach this paper proposes a new approach to solve finite horizon optimal stopping problems for a class of markov processes that includes one dimensional diffusions birth death processes and jump diffusions and continuous time markov chains obtained by time changing diffusions and birth and death processes with levy subordinators when the expectation operator has a purely discrete spectrum in the hilbert space of square integrable payoffs the value function of a discrete optimal stopping problem has an expansion in the eigenfunctions of the expectation operator the bellman s dynamic programming for the value function then reduces to an explicit recursion for the expansion coefficients the value function of the continuous optimal stopping problem is then obtained by extrapolating the value function of the discrete problem to the limit via richardson extrapolation to illustrate the method the paper develops two applications american style commodity futures options and bermudan style abandonment and capaci

land tenure security and investment incentives puzzling evidence from burkina faso abstract the commonsense logic associating higher land security and higher incentives to invest has been recently called into question in the case of african agriculture to be meaningful empirical tests have to be carefully designed so as to take account of the possible endogeneity of the land rights variable this is done in this paper by applying suitable econometric methods to the original data collected in burkina faso the results obtained cast doubt on the existence of a systematic influence of land tenure security on investment by reviewing the justifications for scepticism in the recent literature we are able to conclude that the traditional village order where it exists provides the basic land rights required to stimulate small scale investment

the adaptive mesh model a new approach to efficient option pricing abstract most derivative securities must be priced by numerical techniques these models contain distribution error and nonlinearity error the adaptive mesh model amm sharply reduces nonlinearity error by grafting one or more small sections of fine high resolution lattice onto a tree with coarser time and price steps three different amm structures are presented one for pricing ordinary options one for barrier options and one for computing delta and gamma efficiently the amm approach can be adapted to a wide variety of contingent claims for some common problems accuracy increases by several orders of magnitude with no increase in execution time

numerical valuation of high dimensional multivariate european securities we consider the problem of pricing a contingent claim whose payoff depends on several sources of uncertainty using classical assumptions from the arbitrage pricing theory the theoretical price can be computed as the discounted expected value of future cash flows under the modified risk neutral information process although analytical solutions have been developed elsewhere for a few particular option pricing problems computing the arbitrage prices of securities under several sources of uncertainty is still an open problem in many instances in this paper we present efficient numerical techniques based upon monte carlo simulation for pricing european contingent claims depending on an arbitrary number of risk sources we introduce in particular the method of quadratic resampling qr a new powerful error reduction technique for monte carlo simulation quadratic resampling can be efficiently combined with classical variance reduction methods such as importance sampling our numerical experiments show th

an empirical examination of the pricing of american put options this study is an ex post performance test comparing the accuracy of an american model to a european model for valuing listed options specifically the geske and johnson american put valuation model is compared with the black and scholes european put model on average both models undervalue relative to market prices put options however the geske and johnson model values are significantly closer to market prices than are the black and scholes values

a monte carlo approach for the american put under stochastic interest rates abstract this paper presents a new approach for the valuation of an american put option under stochastic interest rates the paper combines a monte carlo simulation approach for the valuation of bermudan options and the valuation technique for american options proposed by geske and johnson 1984 the american put option valued analytically journal of finance 39 5 1511 1524 numerical results show that the price estimates are accurate with very low standard errors the simulation algorithm used to generate the price estimates is fast and easy to implement the effect of stochastic interest rates is clearly reflected in the option prices especially under regimes where interest rate volatility is high this effect can be important to incorporate also for long lived options this can be an important extension

the pricing of call and put options on foreign exchange this paper derives pricing equations for european puts and calls on foreign exchange the call and put pricing formulas are unlike the black scholes equations for stock options in that there are two relevant interest rates interest rates are stochastic and boundary constraints differ in addition it is shown that both american call and put options have values larger than their european counterparts

continuous workout mortgages efficient pricing and systemic implications abstract this paper studies the continuous workout mortgage cwm a two in one product a fixed rate home loan coupled with negative equity insurance to advocate its viability in mitigating financial fragility in order to tackle the many issues that cwms embrace we perform a range of tasks we optimally price cwms and take a systemic market based approach stipulating that mortgage values and payments should be linked to housing prices and adjusted downward to prevent negative equity we illustrate that amortizing cwms can be the efficient home financing choice for many households we price cwms as american option style defaulting debt in conjunction with prepayment within a continuous time analytic framework we introduce random prepayments via the intensity approach of jarrow and turnbull 1995 we also model the optimal embedded option to default whose exercise is motivated by decreasing random house prices we adapt the barone adesi and whaley 1987 baw approach to work within amortizing mortgage context we derive new closed form and new analytical approximation methodologies which apply both for pricing cwms as well as for pricing the standard us 30 year fixed rate mortgage frm

an fft network for levy option pricing abstract this paper develops a simple network approach to american exotic option valuation under levy processes using the fast fourier transform fft the forward shooting grid fsg technique of the lattice approach is then generalized to expand the fft network to accommodate path dependent variables this network pricing approach is applicable to all levy processes for which the characteristic function is readily available in other words the log value of the underlying asset can follow finite activity or infinite activity levy processes with the powerful computation of fft the proposed network has a negligible additional computational burden compared to the binomial tree approach the early exercise policy and option values in the continuation region are determined in a way very similar to that of the lattice approach numerical examples using american style barrier lookback and asian options demonstrate that the fft network is accurate and efficient

an improved method for pricing and hedging long dated american options abstract the majority of quasi analytic pricing methods for american options are efficient near maturity but are prone to larger errors when time to maturity increases we introduce a new methodology to increase the accuracy of almost any existing quasi analytic approach in pricing long maturity american options the new methodology called the extension method relies on an approximation of the optimal exercise price near the beginning of the contract combined with existing pricing approaches so that the maturity range for which small errors are attainable is extended our method retains the quasi analytic nature of the methods it improves generic quasi analytic formulae for the price of an american put as well as for its hedging parameter are derived our scenarios based numerical study indicates that our method considerably improves both the pricing and the hedging performance of a number of established approaches for a wide range of maturities the superiority of this approach is illustrated with real financial data by considering s p 100 tm leaps options traded from january 2008 to may 2015

the american put under transactions costs abstract this paper examines the optimal super replication of american put options with physical delivery of the underlying asset such as stock options by means of a stock plus riskless asset portfolio the framework of the analysis is the binomial model with proportional transactions costs on stock transactions the paper extends the model for european options originally presented in merton geneva papers risk insurance 14 1989 225 and boyle and vorst j of finance 47 1992 271 and generalized in bensaid et al math finance 2 1992 63 the optimizing framework of this latter study is adapted to put options held by investors and perfectly hedged by a market maker and to put options written by investors and both held and hedged perfectly by a market maker it is shown that a unique optimal super replicating portfolio exists at every node of the binomial tree for the long option as well as for the short option when transactions costs are low

options on the maximum or the minimum of several assets using an intuitive approach that also provides new intuition concerning the black and scholes equation this paper extends the results of johnson and stulz to the pricing of options on the minimum or the maximum of several risky assets

the compound option approach to american options on jump diffusions abstract we derive analytical valuation formulas for compound options when the underlying asset follows a jump diffusion process we then apply these results to value extendible options american call options on stocks that pay discrete dividends and american options on assets that pay continuous proportional dividends numerical results are provided

american option pricing under garch by a markov chain approximation abstract we propose a numerical method for valuing american options in general and for the garch option pricing model in particular the method is based on approximating the underlying asset price process by a finite state time homogeneous markov chain since the markov transition probability matrix can be derived analytically the price of an american option can be computed by simple matrix operations the markov transition probability matrix is typically sparse the use of a sparse matrix representation can substantially increase the dimension of the markov chain to obtain better numerical results the markov chain method works well for the garch option pricing framework and it serves as an alternative to the existing numerical methods for the valuation of american options in other pricing settings we provide a convergence proof for the markov chain method and analyze its numerical performance for the black scholes 1973 and garch option pricing models

valuation of american futures options theory and empirical tests this paper reviews the theory of futures option pricing and tests the valuation principles on transaction prices from the s p 500 equity futures option market the american futures option valuation equations are shown to generate mispricing errors which are systematically related to the degree the option is in the money and to the option s time to expiration the models are also shown to generate abnormal risk adjusted rates of return after transaction costs the joint hypothesis that the american futures option pricing models are correctly specified and that the s p 500 futures option market is efficient is refuted at least for the sample period january 28 1983 through december 30 1983 futures option contracts now trade on every major futures exchange and on a wide variety of underlying futures contracts the chicago mercantile exchange the chicago board of trade the new york futures exchange and the commodity exchange now collectively have more than twenty options written on futures contracts where the underlying spot commodities are financial assets such as stock portfolios bonds notes and eurodollars foreign currencies such as west german marks swiss francs and british pounds precious metals such as gold and silver livestock commodities such as cattle and hogs and agricultural commodities such as corn and soybeans moreover new contract applications are before the commodity futures trading commission and should be actively trading in the near future with the markets for these new contingent claims becoming increasingly active it is appropriate that the fundamentals of futures option valuation be reviewed and tested black 5 provides a framework for the analysis of commodity futures options although his work is explicitly directed at pricing european options on forward contracts it applies to european futures contracts as well if the riskless rate of interest is constant during the futures option life 1 the options currently

a model for the determination of fair premiums on lease cancellation insurance policies lease cancellation insurance protects the lessor against early termination of a cancellable operating lease this paper presents a contingent claims model for determining the fair premium for this type of insurance policy comparative statics are considered and some numerical examples are presented to illustrate the model among other things the insurance premium is sensitive to the expected rate of economic depreciation of the leased asset and to the leased asset s systematic and nonsystematic risk

on the pricing of european and american foreign currency call options abstract this study uses cox ross analysis and dynamic programming techniques to price foreign currency call options we show that under certain conditions the american call price will exceed its european counterpart while under other conditions the two prices will be identical we find that the american premium is a complex function of the degree to which an option is in or out of the money and that this premium is greatest when an option is near in or out we present empirical evidence which shows that the american model significantly improves upon a european model however significant pricing errors associated with the american model remain

a lattice framework for option pricing with two state variables a procedure is developed for the valuation of options when there are two underlying state variables the approach involves an extension of the lattice binomial approach developed by cox ross and rubinstein to value options on a single asset details are given on how the jump probabilities and jump amplitudes may be obtained when there are two state variables this procedure can be used to price any contingent claim whose payoff is a piece wise linear function of two underlying state variables provided these two variables have a bivariate lognormal distribution the accuracy of the method is illustrated by valuing options on the maximum and minimum of two assets and comparing the results for cases in which an exact solution has been obtained for european options one advantage of the lattice approach is that it handles the early exercise feature of american options in addition it should be possible to use this approach to value a number of financial instruments that have been created in recent years

pricing american options under the constant elasticity of variance model and subject to bankruptcy this paper proposes an alternative characterization of the early exercise premium that is valid for any markovian and diffusion underlying price process as well as for any parameterization of the exercise boundary this new representation is shown to provide the best pricing alternative available in the literature for medium and long term american option contracts under the constant elasticity of variance model moreover the proposed pricing methodology is also extended easily to the valuation of american options on defaultable equity and possesses appropriate asymptotic properties

the trade off between child quantity and quality an empirical investigation of trade offs between number of children and their scholastic performance confirms that family size directly affects children s achievement though parents show no favori

numerical valuation of high dimensional multivariate american securities we consider the problem of pricing an american contingent claim whose payoff depends on several sources of uncertainty several efficient numerical lattice based techniques exist for pricing american securities depending on one or few up to three risk sources however these methods cannot be used for high dimensional problems since their memory requirement is exponential in the number of risk sources we present an efficient numerical technique that combines monte carlo simulation with a particular partitioning method of the underlying assets space which we call stratified state aggregation ssa using this technique we can compute accurate approximations of prices of american securities with an arbitrary number of underlying assets our numerical experiments show that the method is practical for pricing american claims depending on up to 400 risk sources

robust pricing of the american put option a note on richardson extrapolation and the early exercise premium this paper presents a detailed analysis of the numerical implementation of the american put option decomposition into an equivalent european option plus an early exercise premium kim 1990 jacka 1991 carr et al 1992 it subsequently introduces a new algorithm based upon this decomposition and richardson extrapolation this new algorithm is based upon a the derivation of the correct order for the error term when applying richardson extrapolation which is used to control the error of the extrapolated prices b an innovative adjustment of kim s 1990 discrete time early exercise premium so that these premiums monotonically converge and therefore it is appropriate to use them in extrapolation and c the optimal exercise frontier can be quickly computed through newton s method permitting the efficient implementation of the decomposition formula in practice numerical experiments show that this new algorithm is accurate efficient easy to implement and competitive in comparison with other methods finally it can also be applied to other american exotic securities

the valuation of american options for a class of diffusion processes we present an integral equation approach for the valuation of american style derivatives when the underlying asset price follows a general diffusion process and the interest rate is stochastic our contribution is fourfold first we show that the exercise region is determined by a single exercise boundary under very general conditions on the interest rate and the dividend yield second based on this result we derive a recursive integral equation for the exercise boundary and provide a parametric representation of the american option price third we apply the results to models with stochastic volatility or stochastic interest rate and to american bond options in one factor models for the cases studied explicit parametric valuation formulas are obtained finally we extend results on american capped options to general diffusion prices numerical schemes based on approximations of the optimal stopping time such as approximations based on a lower bound or on a combination of lower and upper bounds are shown to be valid in this context

pricing american options on foreign assets in a stochastic interest rate economy this paper values american options on foreign assets in a stochastic interest rate economy using a two point geske and johnson 1984 technique the method requires the valuation of just two options a european option and a twice exercisable option i first derive the risk neutral distributions of asset prices under two forward risk adjusted measures closedform solutions for european options on foreign assets are then obtained by applying these risk neutral distributions this article also provides analytic solutions for pricing twiceexercisable options that are at most two dimensional even though the valuation problem involves four risk factors at two exercise dates i report the results of numerical evaluations of american option values using my method and show how they vary with the interest rate parameters i also verify the accuracy of the proposed method by comparing with the benchmark values obtained from the least square method of longstaff and schwartz 2001

the valuation of options on futures contracts rational restrictions are derived for the values of american options on futures contracts for these options the optimal policy in general involves premature exercise a model is developed for valuing options on futures contracts in a constant interest rate setting despite the fact that premature exercise may be optimal the value of this american feature appears to be small and a european formula due to black serves as a useful approximation finally a model is developed to value these options in a world with stochastic interest rates it is shown that the pricing errors caused by ignoring the location of the interest rate relative to its long run mean range from 5 to 7 when the current rate is 200 basis points from its long run value the role of interest rate expectations is therefore crucial to the valuation optimal exercise policies are found from numerical methods for both models in recent years there has been a steady growth in the number of financial assets which one might properly call derivative assets that are available for trading on the organized exchanges among these the most recent and notable are options contracts written on available futures contracts options are now traded on the futures contracts on stock market indexes on the futures contracts on treasury instruments on the futures contracts on foreign exchange rates and on the futures contracts on some metals in design these options contracts do not differ substantially from the well known options contracts on common stock except that the underlying asset is a futures contract the received theory of the valuation of these options suggests that such contracts provide a direct vehicle for investors to alter the terminal payoffs on their portfolios to a desired distribution in the absence of these contracts investors would be forced to pursue a dynamic portfolio policy at the expense of considerable transactions in order to achieve a similar distribution indeed the availability of put options on the futures contracts on stock market indexes now enables well diversified investors to purchase portfolio insurance in his seminal work black 1 provided a complete description of forward and futures contracts as well as the description and valuation of european options on forward contracts and on spot commodities breeden 3 has examined the use of commodity options in a theoretical framework and courtadon 6 has studied the valuation of options on treasury bond futures french 13 cox