What is an Option? An option gives the holder the right, but not the obligation to either buy or sell some stated underlying asset at an agreed exercise price ('strike price'), either before or at some fixed date. In a legal sense an option can be categorised as a 'contingent claim' contract. The seller of an option (also known as a 'writer') grants the purchaser this right (option) in return f...

To hedge its written call, the issuing firm decides to buy shares of the underlying stock or portfolio. The number of shares purchased at time t will depend on the price of the underlying stock at t and on the amount of time remaining until the expiration of the call. Another way of viewing this is that the amount of stock held against the call position depends on the probability that the optio...

A change order is frequently initiated by either the supplier or the buyer, especially when the contract is long-term or when the contractual design is complex. In response to a change order, the buyer can enter a bargaining process to negotiate a new price. If the bargaining fails, she pays a cancellation fee (or penalty) and opens an auction. We call this process the sequential bargaining-auc...

This study proposes a materials procurement contracts model to which the zero-cost collar option is applied for heading price fluctuation risks in construction.The material contract model based on the collar option that consists of the call option striking zone of the construction company(the buyer) following the materials price increase andthe put option striking zone of the material vendor(th...

The aim of this work is to develop a simulation approach to the yield curve evolution in the Heath, Jarrow & Morton (1992) framework. The stochastic quantities considered as affecting the forward rate volatility function are the spot rate and the forward rate. A decomposition of the volatility function into a Hull & White (1990) volatility and a remainder allows us to develop an efficient Contr...

Abstract: The virtue of an American option is that it can be exercised at any time. This right is particularly valuable when there is model uncertainty. Yet almost all the extensive literature on American options assumes away model uncertainty. This paper quantifies the potential value of this flexibility by identifying the supremum on the price of an American option when no model is imposed on...

We present an algorithm and its software implementation that computes implied volatilities for exchangetraded stock options. The LR (Leisen-Reimer) binomial tree is used for the underlying option pricing, which is adjusted for dollar cash dividends. The Brent’s method is used as the root-finding procedure. The option pricing procedure that is at the core of the root-finding is optimised to maxi...

This study employs the mean-variance (MV) criterion, Capital Asset Pricing Model (CAPM) statistics and stochastic dominance (SD) analysis to investigate the performance of option strategies, including writing out-of-the-money (OTM) covered call and buying in-the-money (ITM) protective put, with that of the pure-stock investment by analysing the French data in the entire 1999 year. Our results f...

In Foreign Exchange Markets Compound options (options on options) are traded frequently. Instalment options generalize the concept of Compound options as they allow the holder to prolong a Vanilla Call or Put option by paying instalments of a discrete payment plan. We derive a closed-form solution to the value of such an option in the Black-Scholes model and prove that the limiting case of an I...

In this paper, we apply a combined Monte Carlo and Quasi-Monte Carlo method, which we proposed in an earlier paper [32], to the evaluation of an European Call option and of an Asian Call option. We assume that the stock price of the underlying asset S = S(t) is driven by a Lévy process Z(t), with independent increments distributed according to a NIG distribution. We compare our method with the ...