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In this paper we present two direct methods, a pathwise method and a likelihood ratio method, for estimating derivatives of security prices using simulation. With the direct methods, the information from a single simulation can be used to estimate multiple derivatives along with a security's...
Persistent link: https://www.econbiz.de/10012757508
In a contingent claims framework with a single issue of debt and full information, we show that the presence of a bankruptcy code with automatic stay, absolute priority rules, and potential debt forgiveness, can lead to significant conflicts of interest between the borrowers and lenders. In the...
Persistent link: https://www.econbiz.de/10012714776
This paper examines specification issues and estimates volatility and jump risk premia using the information in the cross-section of Samp;P futures options from 1987 to 2003. We first test for the presence of jumps in volatility by analyzing the higher moment behavior of option implied variance,...
Persistent link: https://www.econbiz.de/10012714862
We study the problem of determining the minimum cost of super-replicating a non-negative contingent claim when there are convex constraints on the portfolio weights. It is shown that the optimal cost with constraints is equal to the price of a related claim without constraints. The related claim...
Persistent link: https://www.econbiz.de/10012715196
Monte Carlo simulation has trouble with American options because the exercise decision at a given date must compare the option's immediate exercise value against its continuation value. The option value if it is not exercised is a function of its value along all possible future price paths from...
Persistent link: https://www.econbiz.de/10012757426
In this paper, we consider American option contracts when the underlying asset has stochastic dividends and stochastic volatility. We provide a full discussion of the theoretical foundations of American option valuation and exercise boundaries. We show how they depend on the various sources of...
Persistent link: https://www.econbiz.de/10012756084
In this paper we provide lower and upper bounds on the prices of American call and put options written on a dividend paying asset. Based on the bounds, we provide two option price approximations. Our second approximation, which uses both lower and upper bound information, has an average accuracy...
Persistent link: https://www.econbiz.de/10005100877
In this paper we provide valuation formulas for several types of American options on two or more assets. Our contribution is twofold. First we characterize the optimal exercises regions and provide valuation formulas for a number of American option contracts on multiple underlying assets with...
Persistent link: https://www.econbiz.de/10005100894