Oil producers are going through a hard period. They have a number of real options at their disposal. This paper addresses the valuation of two of them: the option to delay investment and the option to abandon a producing field. A prerequisite for this is to determine the value of a producing well. For this purpose we draw on a stochastic model of oil price with three risk factors: spot price, l...

Volatility modeling and analysis are traditionally based on either historical price data or option data. Finance theory shows that option prices heavily depend on the underlying stocks’ prices, thus the two kinds of data are related. This paper explores the approach that combines both stock price data and option data to perform the statistical analysis of volatility. We investigate the Black-Sc...

This paper examines how an option plan that rewards managers for firm performance relative to some market or industry benchmark should be structured. Relativeperformance-based compensation advocates contend that conventional stock options do not adequately discriminate between strong and weak managers, typically suggesting “indexed options,” that is, options with an exercise price linked to a m...

Consider an investment system with a nonnegative expected return in a one period economy. We show that, for an option with a given strike price, there exists a pricing interval [pC , pW ] such that replacing the original investment with the option will benefit judging by the Kelly criterion only when the price of the option lies outside of the interval. More specifically, buying call options wi...

This paper considers the American put option valuation in a jumpdiffusion model and relates this optimal-stopping problem to a parabolic integrodifferential free-boundary problem, with special attention to the behavior of the optimal-stopping boundary. We study the regularity of the American option value and obtain in particular a decomposition of the American put option price as the sum of its...

The common paradigm for risk-neutral real-option pricing is a special case encompassed within our general model for valuing investment opportunities. Risk-neutral real option prices deviate from the risk-averse real option values that apply in an incomplete market, giving different rankings of investment opportunities and different optimal exercise strategies. Unlike risk-neutral prices, more g...

Options or “privileges” as they were known in early 19th Century America actually appeared on the financial scene around the same times as stocks. Initially, there were numerous problems with the trading of options. The terms of the contract were different from contract to contract, contracts had to be exercised in person, and there really was no secondary market to trade. Options were eventual...

A barrier option is an option whose payoff depends on whether the price path of the underlying asset ever reaches certain predetermined price levels called the barriers. A single(double-) barrier option is a barrier option with one (two, respectively) barrier(s). No simple and exact closed-form pricing formula for double-barrier options has been reported in the literature. This paper proposes a...