The Implication of Missing the Optimal-Exercise Time of an American Option PDF Download
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Author: Arun Chockalingam
Publisher:
ISBN:
Category :
Languages : en
Pages : 24
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Book Description
The optimal-exercise policy of an American option dictates when the option should be exercised. In this paper, we consider the implications of missing the optimal exercise time of an American option. For the put option, this means holding the option until it is deeper in-the-money when the optimal decision would have been to exercise instead. We derive an upper bound on the maximum possible loss incurred by such an option holder. This upper bound requires no knowledge of the optimal-exercise policy or true price function. This upper bound is a function of only the option-holders exercise strategy and the intrinsic value of the option. We show that this result holds true for both put and call options under a variety of market models ranging from the simple Black-Scholes model to complex stochastic-volatility jump-diffusion models. Numerical illustrations of this result are provided. We then use this result to study numerically how the cost of delaying exercise varies across market models and call and put options. We also use this result as a tool to numerically investigate the relation between an option-holders risk-preference levels and the maximum possible loss he may incur when adopting a target-payoff policy that is a function of his risk-preference level.
Author: Arun Chockalingam
Publisher:
ISBN:
Category :
Languages : en
Pages : 24
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Book Description
The optimal-exercise policy of an American option dictates when the option should be exercised. In this paper, we consider the implications of missing the optimal exercise time of an American option. For the put option, this means holding the option until it is deeper in-the-money when the optimal decision would have been to exercise instead. We derive an upper bound on the maximum possible loss incurred by such an option holder. This upper bound requires no knowledge of the optimal-exercise policy or true price function. This upper bound is a function of only the option-holders exercise strategy and the intrinsic value of the option. We show that this result holds true for both put and call options under a variety of market models ranging from the simple Black-Scholes model to complex stochastic-volatility jump-diffusion models. Numerical illustrations of this result are provided. We then use this result to study numerically how the cost of delaying exercise varies across market models and call and put options. We also use this result as a tool to numerically investigate the relation between an option-holders risk-preference levels and the maximum possible loss he may incur when adopting a target-payoff policy that is a function of his risk-preference level.
Author: University of Minnesota. Institute for Mathematics and Its Applications
Publisher:
ISBN:
Category :
Languages : en
Pages : 21
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Book Description
Author:
Publisher:
ISBN:
Category :
Languages : en
Pages :
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Book Description
The fast advancement in computer technologies in the recent years has made the use of simulation to estimate stock/equity performances and pricing possible; however, determining the optimal exercise time and prices of American options using Monte-Carlo simulation is still a computationally challenging task due to the involved computer memory and computational complexity requirements. At each time step, the investor must decide whether to exercise the option to get the immediate payoff, or hold on to the option until a later time. Traditionally, the stock options are simulated using Monte-Carlo methods and all stock prices along the path are stored, and then the optimal exercise time is determined starting at the final time period and continuing backward in time. Also, as the number of paths simulated increases, the number of simultaneous equations that need to be solved at each time step grow proportionally. Currently, two theoretical methods have emerged in determining the optimal exercise problem. The first method uses the concept of least-squares approach in linear regression to estimate the value of continuing to hold on to the option via a set of randomly generated future stock prices. Then, the value of continuing can be compared to the payoff at current time from exercising the option and a decision can be reached, which gives the investor a higher value. The second method uses the finite difference approach to establish an exercise boundary for the American option via an artificially generated mesh on both possible stock prices and decision times. Then, the stock price is simulated and the method checks to see if it is inside the exercise boundary. In this research, these two solution approaches are evaluated and compared using discrete event simulation. This allows complex methods to be simulated with minimal coding efforts. Finally, the results from each method are compared. Although a more conservative method cannot be determined, the least-squares method is faster, more concise, easier to implement, and requires less memory than the mesh method. The motivation for this research stems from interest in simulating and evaluating complicated solution methods to the optimal exercise problem, yet requiring little programming effort to produce accurate and efficient estimation results.
Author: Ernst & Young LLP
Publisher: John Wiley & Sons
ISBN: 0470694416
Category : Business & Economics
Languages : en
Pages : 3424
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Book Description
IFRSs, the standards set by the International Accounting Standards Board (IASB), are complex and sometimes obscure. Understanding their implications and applying them appropriately requires something special....and that is why International GAAP 2008 is the essential tool for anyone applying, auditing, interpreting, regulating, studying and teaching international financial reporting. It provides expert interpretation and practical guidance for busy professionals, and includes, in every chapter, detailed analysis of how complex financial reporting problems can be resolved appropriately and effectively. International GAAP 2008 is the only globally focused work on IFRSs. It is not constrained by any individual country’s legislation or financial reporting regulations, and it ensures an international consistency of approach unavailable elsewhere. It shows how difficult practical issues should be approached in the new complex global world of international financial reporting, where IFRSs have become the accepted financial reporting system in more than 120 countries. This integrated approach provides a unique level of authoritative material for anyone involved in preparing, interpreting or auditing company accounts, for regulators, academic researchers and for all students of accountancy. The International Financial Reporting Group of Ernst & Young includes financial reporting specialists from throughout the world. Complex technical accounting issues are explained clearly in a practical working context that enables immediate understanding of the point at issue. International GAAP 2008 is accompanied by numerous worked examples, a comprehensive discussion of the practical issues of the day and the possible alternative solutions available, and hundreds of practical illustrations taken from the actual financial statements of companies that report under IFRSs. The only globally focused work on IFRS giving an international consistency of approach unavailable elsewhere This new and essential volume of practical guidance and expert interpretation deals with every aspect of applying International Financial Reporting Standards (IFRS) appropriately and effectively Written by financial reporting experts from the International Financial Reporting Group of Ernst & Young Includes a new chapter on Extractive Industries (mining, oil & gas), the biggest industry sector in the world This new edition in the International GAAP® series serves as a successor to the same authors’ market-dominating UK GAAP and UK & International GAAP "an important part to play in the process of promoting consistent, comparable and high quality financial reporting under IFRSs ... a book that not only provides an analysis of the requirements of the standards and the principles that they expound, but also presents a unique explanation of how the standards should be interpreted and applied in practice." —the Chairman of Trustees of the IASC Foundation Praise for previous editions in the International GAAP series: "A standard reference work" —Financial Times "The definitive guide to financial reporting" —The Times
Author: J. J. Kinahan
Publisher: John Wiley & Sons
ISBN: 1119291518
Category : Business & Economics
Languages : en
Pages : 299
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Book Description
Learn the ins-and-outs of options trading with clear, practical guidance Essential Option Strategies is an introductory guide to options trading, designed to help new options traders better understand the market and the potential opportunities that exist. This book is designed to bring you up to speed with current practices and help you implement your own option trading strategies. You'll create a plan, track indicators, and understand underlying instruments, then apply that central investing knowledge directly to the options market. The discussion on pricing determinants and probabilities uses an intuitive approach to complex calculations, providing clear examples with no advanced math required, and extensive explanation of spreads, butterflies, and condors brings advanced strategies down to earth. Easy-reference appendices clarify the Greek terms and technical analysis charts, while focused discussion and expert insight throughout provide a highly informative crash course on options trading. Options trading has undergone a rapid evolution beyond stocks and commodities into asset classes including fixed-income, precious metals, energy, and more. This book helps you build a solid foundation in the fundamentals, giving you a knowledge base that applies no matter how the instruments change. This book is designed to help you: Understand the options market inside and out Avoid common mistakes Learn some basic positions, and trades Read charts and interpret probabilities Once the domain of the elites, the options market has been thrown wide open thanks to real-time price quotes, through brokerages, and the free flow of information online. The process of buying and selling options contracts is faster and more efficient than ever, and Wall Street is facing stiff competition from independent analysts and financial websites. As much as the market has changed, the fundamentals are the same—and Essential Option Strategies aims to provide expert guidance throughout the learning process.
Author: David G. Carmichael
Publisher: CRC Press
ISBN: 1466576707
Category : Technology & Engineering
Languages : en
Pages : 256
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Book Description
Established Deterministic Investment Appraisal versus Uncertainty in InvestmentWhen it comes to investing in an infrastructure project, the conventional approach is to evaluate risk through a deterministic approach. Infrastructure Investment: An Engineering Perspective, however, takes on uncertainty in investment. Of interest to engineering consult
Author: Ernst & Young LLP
Publisher: John Wiley & Sons
ISBN: 1118589807
Category : Business & Economics
Languages : en
Pages : 4412
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Book Description
International GAAP® 2013 goes much further than explanation. It provides a comprehensive guide to interpreting and implementing IFRS, sets IFRS in a relevant business context and provides insights into how complex practical issues should be resolved in the real world of global financial reporting. This book is an essential tool for anyone applying, auditing, interpreting, regulating, studying or teaching international financial reporting. Written by financial reporting professionals from the International Financial Reporting Group of Ernst & Young, this three-volume guide to reporting under IFRS provides a global perspective on the real-world interpretation and practical application of IFRS. Complex technical accounting issues are explained clearly and IFRS is set in a practical context with numerous worked examples and hundreds of illustrations from the published financial reports of major listed companies from around the world. The 2013 edition of International GAAP® has been fully revised and updated in order to: Address all new, revised and amended authoritative pronouncements and interpretations including, for many entities, the mandatory adoption in 2013 of IFRS 10 (Consolidated Financial Statements), IFRS 11 (Joint Arrangements), IFRS 12 (Disclosure of Interests in Other Entities), IFRS 13 (Fair Value Measurement) and IAS 19 Revised (Employee Benefits). Explain the many initiatives and discussions that are currently being pursued by the IASB and by the IFRS Interpretations Committee and the potential consequential changes to accounting requirements. In particular, projects on Financial Instruments, Revenue Recognition, Leases and Insurance Contracts may all significantly change current accounting practice. Provide insight and guidance from a truly global perspective on the many issues relating to the interpretation and practical application of IFRS, based on the extensive experience of the book’s authors in dealing with recent day-to-day practical issues. www.igaap.info
Author: Robert E. Whaley
Publisher: John Wiley & Sons
ISBN: 0470086386
Category : Business & Economics
Languages : en
Pages : 962
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Book Description
Robert Whaley has more than twenty-five years of experience in the world of finance, and with this book he shares his hard-won knowledge in the field of derivatives with you. Divided into ten information-packed parts, Derivatives shows you how this financial tool can be used in practice to create risk management, valuation, and investment solutions that are appropriate for a variety of market situations.
Author: Han T. J. Smit
Publisher: Princeton University Press
ISBN: 1400829399
Category : Business & Economics
Languages : en
Pages : 504
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Book Description
Corporate finance and corporate strategy have long been seen as different sides of the same coin. Though both focus on the same broad problem, investment decision-making, the gap between the two sides--and between theory and practice--remains embarrassingly large. This book synthesizes cutting-edge developments in corporate finance and related fields--in particular, real options and game theory--to help bridge this gap. In clear, straightforward exposition and through numerous examples and applications from various industries, Han Smit and Lenos Trigeorgis set forth an extended valuation framework for competitive strategies. The book follows a problem-solving approach that synthesizes ideas from game theory, real options, and strategy. Thinking in terms of options-games can help managers address questions such as: When is it best to invest early to preempt competitive entry, and when to wait? Should a firm compete in R&D or adopt an accommodating stance? How does one value growth options or infrastructure investments? The authors provide a wide range of valuation examples, such as acquisition strategies, R&D investment in high-tech sectors, joint research ventures, product introductions in consumer electronics, infrastructure, and oil exploration investment. Representing a major step beyond standard real options or strategy analysis, and extending the power of real options and strategic thinking in a rigorous fashion, Strategic Investment will be an indispensable guide and resource for corporate managers, MBA students, and academics alike.
Author: Ernst & Young LLP
Publisher: John Wiley & Sons
ISBN: 1119772664
Category : Business & Economics
Languages : en
Pages : 320
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Book Description
Global edition 16 International GAAP® 2021 International GAAP® 2021 is a detailed guide to interpreting and implementing International Financial Reporting Standards (IFRS). By setting IFRS in a relevant business context, it provides insights on how complex practical issues should be resolved in the real world of global financial reporting. This book is an essential tool for anyone applying, auditing, interpreting, regulating, studying or teaching IFRS. Written by EY financial reporting professionals from around the world, this three-volume guide to reporting under IFRS provides a global perspective on the application of IFRS. The book explains complex technical accounting issues clearly by setting IFRS in a practical context with numerous worked examples and hundreds of illustrations from the published financial reports of major listed companies from around the world. The 2021 edition of International GAAP® has been fully revised and updated in order to: Provide expanded discussion and practical illustrations on the many implementation issues arising as entities continue to apply IFRS 16 (Leases), including those related to recent rent concessions and the associated narrow scope amendment issued by the International Accounting Standards Board (IASB). Include an updated chapter on the new insurance contracts standard IFRS 17 (Insurance Contracts), which reflects the IASB's recently issued Amendments to IFRS 17, resulting in a number of significant changes as well as many other editorial alterations. The chapter also discusses implementation issues and explores other matters arising as insurers prepare for the adoption of the standard. Continue to investigate the many application issues arising as entities apply IFRS 9 (Financial Instruments) and IFRS 15 (Revenue from Contracts with Customers). Discuss the IASB's amendments to IFRS 9 and related standards to address the effects of the Interbank Offered Rates (IBOR) reform on financial reporting. Illustrate the application of IFRS to the accounting for natural disasters highlighted by the accounting issues related to the recent coronavirus pandemic. Discuss the new agenda decisions issued by the IFRS Interpretations Committee since the preparation of the 2020 edition. Address the amendments to standards and the many other initiatives that are currently being discussed by the IASB and the potential consequential changes to accounting requirements. Provide further insight on the many issues relating to the practical application of IFRS, based on the extensive experience of the book's authors in dealing with current issues. EY | Assurance | Tax | Strategy and Transactions | Consulting About EY EY is a global leader in assurance, tax, strategy, transaction and consulting services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities. EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. Information about how EY collects and uses personal data and a description of the rights individuals have under data protection legislation are available via ey.com/privacy. For more information about our organization, please visit ey.com.
