This study extends the Hull and White (1993 J. Derivatives 1 21-31) binomial method to construct a trinomial model for the valuation of American-style options whose strike price can be reset to a new level. The reset criterion is conditioned upon the average underlying asset price hitting the...

The American early exercise feature of the Real Option to invest in a new project is important in capital budgeting and project valuation. Closed form solutions for American, and therefore Real, Options are known for two special cases; an infinite horizon generates the Merton (Bell Journal of...

In this paper we examine the variables that explain the cross-section of UK stock returns. Previous studies have found that the CAPM beta has moderate or even insignificant explanatory power once the Fama French factors are included. However, we control for different realised risk premia in up...

We analyse the rate of return and expected exercise time of Merton-style options (1973) employed in many real option situations where the possibility of exercise is both perpetual and American in nature. Using risk-neutral and risk-adjusted pricing techniques, Merton-style options are shown to...

The continuous-time formula for expected payoff to holding an option, which nests several major pricing tools, is derived. It is shown also that under current market conditions the true exercise probability, N (d4), lies halfway between the two more familiar terms: N (d1) and N (d2).

This article analyzes present value costs under stochastic interest rates and investigates the effect of interest rate uncertainty on the replacement investment decision that a firm must make when a piece of equipment becomes obsolete and needs replacement with either short- or long-lived...

This article returns to the choice of method for calculating option hedge ratios discussed by Pelsser and Vorst (1994). Where they demonstrated that numerical differentiation of a binomial model compared poorly to their design of an extended tree, this study shows that the Binomial...

This article discusses convergence problems when calculating Vega (option sensitivity to volatility) that arise from discretization errors embedded in the lattice approach. Four alternative improvements to the traditional binomial method are discussed and investigated for performance. We also...

Empirical pricing kernels for the UK equity market are derived as the ratio between risk-neutral densities, inferred from FTSE 100 index options, and historical real-world densities, estimated from time series of the index. The kernels thus obtained are almost compatible with a risk averse...

This paper derives a pricing model for a quanto foreign equity/domestic floating rate swap in which one party pays domestic floating interest rates and receives foreign stock returns determined in the foreign currency, but is paid in the domestic currency. We use the risk-neutral valuation...