Draft. We combine static hedging and real options valuation ideas to build a capital budgeting technique . Here one applies the market information of derivative prices on a traded 'quasi twin security' to benchmark a single-step stochastic cash stream. We provide a transparent, more or less closed-form solution for valuing these streams . The fundamental properties of this valuation rule are then studied. The derivation of the pricing rule is developed in such a way as to generalize intuitive real option considerations to continuous state step-by-step. We also discuss some required mathematical finance machinery as wellas results of Breeden-Litzenberger type .
We investigate a statistical-static hedging technique for pricing assets considered as single-step stochastic cash flows. The valuation is based on constructing in a canonical way a European style derivative on a benchmark security such that the physical payoff distribution coincides with the (corrected) physical asset price distribution. It turns out that this pricing technique is economically viable under some natural cases . The fundamental properties of the pricing rule arising in this way are investigated here. This gives rise to a novel way of estimating state price density. Our approach has some tangible benefits: its principle is transparent, and it is easy to implement numerically while avoiding many issues typically involved in such an estimation. As an application, it is shown how this method can be used in performing kurtosis corrections to the standard Black-Scholes-Merton model by a mixture of several types of distributions. In fact, the technique is non-parametric in nature, and it can handle in principle any physical distribution, e.g., a multimodal one. Some other interesting applications are discussed as well .
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Draft. We combine static hedging and real options valuation ideas to build a capital budgeting technique . Here one applies the market information of derivative prices on a traded 'quasi twin security' to benchmark a
We investigate a statistical-static hedging technique for pricing assets considered as
R
stochastic cash stream. We provide a transparent, more or less closed-form solution for valuing these streams
stochastic cash flows. The valuation is based on constructing in a canonical way a European style derivative on a benchmark security such that the physical payoff distribution coincides with the (corrected) physical asset price distribution. It turns out that this pricing technique is economically viable under some natural cases
D
this valuation rule are then studied. The derivation of
R
is developed in such a way as to generalize intuitive real option considerations to continuous state step-by-step. We also discuss some required mathematical finance machinery as wellas results of Breeden-Litzenberger type
arising in this way are investigated here. This gives rise to a novel way of estimating state price density. Our approach has some tangible benefits: its principle is transparent, and it is easy to implement numerically while avoiding many issues typically involved in such an estimation. As an application, it is shown how this method can be used in performing kurtosis corrections to the standard Black-Scholes-Merton model by a mixture of several types of distributions. In fact, the technique is non-parametric in nature, and it can handle in principle any physical distribution, e.g., a multimodal one. Some other interesting applications are discussed as well