Exercise Price Research Articles

The choice of equity financing: Floating-priced warrants versus SEOs

A floating-priced warrant (FPW) is an American warrant with a resettable exercise price at a discount from the market price. FPWs are frequently issued by Japanese firms as an alternative equity financing method to seasoned equity offerings (SEOs). This study reveals what kind of firms prefer to issue FPWs rather than SEOs and why. The results reveal that issuers of FPWs are poor performers and have higher levels of information asymmetry compared to issuers of SEOs. Such firms will face higher flotation costs when issuing common stocks directly. However, the flotation costs of selling equity via FPWs are relatively fixed and irrelevant to the issuer's firm characteristics. Although the average flotation cost of FPWs is higher than that of SEOs, issuers of FPWs would face an even higher flotation cost had they conducted SEOs instead. The result supports the flotation cost minimization hypothesis as a motive for issuing FPWs.

Optimal Pricing and Ordering Strategies with a Flexible Return Strategy under Uncertainty

To coordinate the supply chain risk caused by demand uncertainty, this paper proposed a flexible return strategy under demand uncertainty, in which the retailer can choose return quantity independently by put option after the selling season, while the return quantity is usually determined by the supplier in the classical return strategy. In our novel return strategy, the exercise price is not fixed, and we developed the base model of this strategy, named the selective buyback contracts model. We have solved the optimal pricing and ordering strategies of supply chain members. Numerical studies demonstrated that the contracts can coordinate a supply chain with one retailer and one supplier, and the supplier can adjust the profit distribution of the supply chain by adjusting the option exercise price. Compared with other return strategies, the selective buyback contracts give the retailer more power of choice, and the supplier receives risk compensation from the put options.

ANALISIS PENETAPAN HARGA DAN PENILAIAN OPSI PADA PERUSAHAAAN

This research aims to analyze pricing and option assessment on a company. Based on these objectives, researchers used a qualitative descriptive type of research. The source of the data in this study is secondary data derived from a variety of literature, documents and other written materials directly related to this research as well as information from various media. Data Collection Method used in this study is Documentation where is a method of data collection by looking for things or variables with the form of defects, books, newspapers, media and so on. The collected data is then processed with interpretive qualitative analysis. Data processing, taking place in conjunction with the data collection process, through 3 stages of data reduction, data presentation, and data verification. The results of this study can be concluded that the pricing and assessment of options at the company is to import a car worth DM1,000,000 cars from Germany and paid for in the next three months. forward rate Rp4,750,-/DM for hedging the possibility of strengthening marks in the future or have to buy options-buy marks with exercise price Rp4,750,-/DM with maturity in the next three months. Suppose the premium option-buy marks is Rp25,-/DM, then payoff profile. If the importer chooses to use forward there is a possibility that if marks at the time of payment depreciate against the rupiah to Rp4,600,-/DM then the importer must still pay marks at a price of Rp4,750,-/DM. Importer suffered a loss of Rp150,-/DM. If using the option-buy marks then the maximum loss is only Rp25,-/DM, because the importer does not need toexercise his options if the spot rate marks are Rp4,600,-/DM. There are several factors that affect the value of an option are: 1) The price of the stock or its underlying asset, 2) Exercise Price, 3) Interest Rate, 4) The period will be due and 5) The volality of the share price or asset price.

THE RELATIONSHIP BETWEEN OPTIONS DERIVATIVES AND FINANCIAL PERFORMANCE OF SELECTED LISTED COMMERCIAL BANKS IN KENYA

Purpose: The purpose of the study was to ascertain the relationship between options derivatives and financial performance of selected listed commercial banks in Kenya.
 Methodology: Descriptive research design was used when collecting data using closed ended questionnaires from the selected 11 listed commercial banks in Kenya. The target population included 156 respondents who were 25 risk managers, 53 operations managers, 33 credit managers and 45 marketing managers to participate in the study. The study selected all of the 156 respondents through census sampling technique. Pre-test questionnaires was sent to six respondents who were junior officers in risk, credit, operations and marketing departments of non-listed commercial banks in Meru Kenya. The collected data was then coded and analyzed quantitatively using the descriptive statistics such as mean, percentage and standard deviation while inferential statisticsperson correlation analysis were used. Linear regression models were also used. Further on, the tables, graphs were used when indicating the analysis results.
 Results: Options had a statistically significant relationship with financial performance. Most respondents agreed that there were clear procedures used to solve options price discrepancies. It had a mean of 4.79 and standard deviation of 0.62. However, most respondents disagreed that options derivatives market activities were improving in the banks. It had a mean of 3.85 and standard deviation of 1.05. The results further indicated that options had an R value of .793a and Durbin Watson value of 1.292 showing there was a strong correlation between the two variables, while the R-square was 0.629. This implied that options as a paradigm predicted 62.9% of financial performance variable in this study.Options also had a significant p-value of 0.018.
 Unique contribution to theory, policy and practice: The results indicated that commercial banks were really incurring more costs as compared to profits generated due to errors made by the employees when engaging in various options derivatives markets. In addition, when financial derivatives owners were given the rights and not forced to purchase or vend an underlying asset at a strike price or exercise price, at or earlier than the expiry date of the options, there was an above average purchase. The study recommends that the bank staff should explain full information on the options derivatives so that when a client is making the purchase, they are well knowledgeable. This knowledge should begin from the procedures followed when making a purchase, sale or transfer of option derivatives in the securities exchange market. In addition, any costs associated with the options derivatives should be fully communicated to clients priorly to avoid premature termination of options derivatives contracts. Further on, there should be more training on banks staffs by the bank management so that they are equipped with knowledge on the specifics of options derivatives trading. By doing so, the chances of errors would be minimized.

Coordination of a fresh agricultural product supply chain with option contract under cost and loss disruptions.

This paper analyzes the option coordination problem of a fresh agricultural product supply chain under two supply chain structures, when the production cost and the loss rate are disrupted simultaneously. This paper provides the explicit option coordination conditions for the disrupted supply chain under two supply chain structures, and then explores the effects of the disruptions and supply chain structure on the option coordination conditions. The results suggest that it is unfavorable to apply the original coordinating contracts without disruptions to coordinate the disrupted supply chain. The coordination of the disrupted supply chain can be achieved with knowledge of the distribution of demand. In two coordinating contracts for the disrupted supply chain, the exercise price is still at the original level without disruptions while the option price deviates from the original level without disruptions. Moreover, the relationships of the coordination conditions in two supply chain structures depend on the value of the profit allocation coefficient. When the profit allocation coefficient exceeds (falls behind) a certain threshold, the option price is set at a higher (lower) value in the supplier-led supply chain structure than in the distributor-led supply chain structure, while the exercise price is set at a lower (higher) value in the supplier-led supply chain structure than in the distributor-led supply chain structure. Finally, the disrupted supply chain with any supply chain structure will perform better in the modified coordinating contracts than in the original coordinating contracts without disruptions.

Asian rainbow option pricing formulas of uncertain stock model.

Asian rainbow option is option on the minimum or the maximum of several average prices. In modern financial market, Asian rainbow option is an effective instrument for asset allocation and risk management. The investor with Asian rainbow option enjoys an entitlement to select a max or min from multiple assets with an exercise price at maturity date. The investor has to defray fee to acquire this right, which raises the option pricing issue. This paper mainly explores the pricing of Asian rainbow option in the uncertain financial environment, in which the underlying assets prices are treated as uncertain processes. Here, the pricing formulas of Asian rainbow option are derived under the condition that stock prices obey uncertain differential equations driven by independent Liu processes. Furthermore, some numerical examples are designed to compute the prices of these options.

The analysis of bullwhip effect in supply chain based on hedging strategy compared with optimal order quantity strategy

The bullwhip effect is one of the most important problems in the supply chain management. It can cause large inefficiency in supply chain. Although there are many researches about bullwhip effect, few studies have investigated this phenomenon caused by product price fluctuation. In this paper we consider a two-period supply chain consisting of one supplier, one wholesaler and one retailer. The wholesale price may increase greatly in the beginning of second period. If this happens, a large number of end customers will go to purchase the product from retailer. For managing the end customers’ demands in the second period, we consider two ordering strategies available to the retailer including optimal order quantity strategy and hedging strategy with call option. For each strategy, we calculate the bullwhip effect ratio for two periods and compare the results. We found that the lower exercise price in hedging strategy compared with the wholesale price in the optimal order quantity strategy must not contribute to extra product purchase. The research provides new insights into how hedging strategy can reduce bullwhip effect.

An optimal put option contract for a reverse supply chain: case of remanufacturing capacity uncertainty.

Reverse supply chain (RSC) management can be implemented to ameliorate environmental and economic goals simultaneously. In 2020, the devastating influences generated by the COVID-19 global pandemic had established high uncertainty in the manufacturers' capacity, which can hinder the fulfillment of such goals. To address such a problem, in this research, we analyze a two-echelon RSC, including a re-manufacturer who, despite facing the remanufacturing capacity uncertainty, remanufactures eligible obsolete products, then re-enters the marketplace, and a collector who accumulates eligible obsolete products from consumers. We survey centralized and decentralized decisions, and also a condition where the collector, as a Stackelberg game leader, offers a put option contract as a risk-sharing approach and decides on both option and exercise prices; in return, the re-manufacturer determines the order quantity. Contrary to previous studies in which the value of option contracts has been analyzed under demand disruptions, this paper aims to address the performance of a put option contract to mitigate the remanufacturing capacity uncertainty in an RSC. Our results demonstrate that by offering the put option contract and determining the option price as nearly low as the marginal refund cost, not only can the collector motivate the re-manufacturer to augment its order quantity but both parties also attain a win–win profit-sharing outcome. Besides, the customized put option contract can achieve Pareto-improving channel coordination in the condition of remanufacturing capacity uncertainty.

Supply Chain Coordination with a Risk-Averse Retailer and the Call Option Contract in the Presence of a Service Requirement

This paper investigates a supply chain consisting of a single risk-neutral supplier and a single risk-averse retailer with the call option contract and a service requirement, where the retailer’s objective is to maximize the Conditional Value-at-Risk about profit. The optimal ordering quantity of the retailer and the optimal production quantity of the supplier are derived with the call option contract in the presence of a service requirement. Furthermore, by investigating the effect of the service level and the risk aversion on the supply chain, it is found that the retailer’s optimal Conditional Value-at-Risk is non-increasing in the service requirement and increasing in the risk aversion, while the supplier’s optimal expected profit is non-decreasing in the service and decreasing in the risk aversion. In addition, this paper demonstrates the impact of contract parameters on the service-constrained supply chain, and finds that the retailer’s optimal Conditional Value-at-Risk may be increasing, constant or decreasing in unit exercise price. Finally, with the call option contract, a distribution-free coordination condition is derived to achieve the Pareto improvement under Conditional Value-at-Risk criterion in the presence of a service requirement.

Fresh produce price-setting newsvendor with bidirectional option contracts

<p style='text-indent:20px;'>This paper examines a newsvendor problem for fresh produce with bidirectional option contracts, in which the stochastic demand is price-dependent. The bidirectional option, which may be exercised as either a call or put option, provides the newsvendor the flexibility to increase or decrease the initial order after real demand is realized, respectively. The condition of the fresh produce may deteriorate during circulation. The optimal order and pricing decisions for the newsvendor are analytically derived with the bidirectional option and circulation loss. Comparative statics analysis show that the optimal total order quantity and optimal retail price of the newsvendor decrease with the option price but increase with the exercise price. In addition, numerical examples show that the optimal total order quantity and optimal retail price of the newsvendor increase with the circulation loss. The optimal option order quantity first decreases then increases with the exercise price. The optimal firm order quantity first increases then decreases with the circulation loss. The maximum profit of the newsvendor decreases with the option price and circulation loss but increases with the exercise price. Furthermore, the values of bidirectional option contracts are more significant when the demand uncertainty and the circulation loss become more volatile.</p>

Impacts of put option contract and supply chain structure in a multi-period supply chain with uncertain demand

This paper builds the multi-period optimization models that incorporate put option contract and two supply chain structures to determine the production decision for a supplier and the ordering decision for a manufacturer in a two-stage supply chain. This paper applies the method of dynamic programming to derive the structures of optimal policies and provides an approximate algorithm to evaluate the myopic policies. This paper also conducts numerical examples to illustrate the impacts of put option contract, supply chain structure and demand risk on the members’ decisions and total profits as well as the channel’s total profit. The results indicate that put option contract can motivate to increase the channel’s service level and reduce the manufacturer’s inventory risk under two supply chain structures, when compared to the case without put option contract. In the manufacturer-led structure, the channel always benefits from put option contract, the supplier benefits from put option contract with a high option price and a low exercise price, while the manufacturer benefits from put option contract with a low option price and a high exercise price. In the supplier-led structure, the channel and the manufacturer always benefit from put option contract, while the supplier benefits from put option contract with a high option price and a low exercise price. With put option contract, the supplier is more profitable in the manufacturer-led structure than in the supplier-led structure, while the manufacturer and the channel are more profitable in the supplier-led structure than in the manufacturer-led structure. Without and with put option contract, the optimal total profits of two members and the channel will first decrease and then increase in the demand risk. Finally, this paper identifies the explicit conditions under which the multi-period supply chain can be coordinatedviaput option contract under two supply chain structures. With a coordinating contract, the supplier and the manufacturer are better off compared to the case without put option contract.

A Closed-form Pricing Solution for Options on Assets with Pricing Errors

This paper examines the effects that pricing errors in the underlying asset have on options prices, their Greeks, and their implied risk neutral densities. Pricing errors can be viewed as a random proportional transaction cost. When pricing errors are information-unrelated, options prices are unambiguously higher than the Black-Scholes case and increasing in the pricing error variance. Hedging volatility is higher and the optimal exercise price for American put options is decreased. The option implied risk-neutral density and option Greeks are materially affected, which leads to suboptimal risk management and hedging when pricing errors are not accounted for.

Risk-Based Capital and Leverage Ratios Adjustments by Banks: Experience from Canada and the U.S.

The Basel III framework comes with the requirement of a minimum leverage ratio as a backstop to the existing Basel II risk-based capital ratio. Given that Canada and the US have adopted similar double capital rules prior to Basel III, we study the implications of these two rules on bank capital adjustments. We show that the mix of the two-capital rules can be viewed as a “hockey stick” shape single leverage ratio akin to a call option on the bank asset risk, measured by the risk-weighted assets (RWA) -to- total assets ratio, known as the RWA density. The exercise price of this call option is the quotient of the required minimum leverage ratio and the minimum risk-based capital ratio. Since a tighter limit was imposed in Canada than in the US on the combined leverage ratio, Canadian banks has exhibited asset risk-sensitive leverage ratios well before the 2007 global financial crisis (GFC). Meanwhile, the loosening regulatory limit on the US bank leverage ratio has rendered the leverage ratio in the US irresponsive or inversely related to US banks’ asset risk.

A real option-based valuation model for Shared Water Saving Management Contract

Abstract Water Saving Management Contract (WSMC) is believed as an efficient water-saving model and developed in recent years. However, because the high upfront investment cost and great uncertainty of WSMC, the static evaluation methods have defects in evaluating the return on investment of WSMC projects. Real option theory makes up for these defects and is applied in this paper with the expectation to evaluate the uncertainty of a Shared WSMC project and the economic feasibility of investing in the project. First, a new expression of volatility is presented based on the characteristics of Shared WSMC projects. The volatility contains uncertainties in water price, the amount of water-saving, waterborne fee, and operating & maintenance cost simultaneously. Then, it is assumed that the water saving service company is entitled options to abandon and expand the Shared WSMC project during the contract period. Based on the existing model, the exercise prices of the two options are improved. Furthermore, the real option value (ROV) of a Shared WSMC project is solved using the binomial tree option pricing model, and the economic feasibility of the project is comprehensively evaluated by combining with the static net present value and ROV organically. Finally, the Shared WSMC project of the Hebei University of Engineering in China is studied to verify the validity of the proposed method. The obtained results indicate that the economic value of the Shared WSMC project is expanded by the ROV, which means that additional value can be gained through flexible strategies and management in the context of uncertainty. Besides, the additional economic benefits of the two options vary significantly for different Shared WSMC projects. Expand option is particularly essential when Shared WSMC projects with a considerable return on investment. Conversely, the abandon option should be taken seriously. Especially when both options are considered together, the additional economic benefits are sub-additive.

Coordinating a supply chain with demand information updating

<p style='text-indent:20px;'>We investigate how to coordinate a two-echelon supply chain in which a supplier builds production capacity in advance and a manufacturer makes the ordering decision based on updated demand information. By combining European call option and buyback mechanisms, we propose a new hybrid option-buyback contract to coordinate such a supply chain with demand information updating. We construct a two-stage optimization model in that the supplier offers option price and the manufacturer decides initial ordering quantity in the first stage, then the supplier offers exercise price and buyback price and the manufacturer decides final ordering quantity in the second stage after demand information is updated. In both the centralized and decentralized settings, we analytically derive the optimal equilibrium solutions of two-stage ordering quantity. Particularly, we obtain closed-form formulae to describe the members' optimal behavior with a bivariate uniformly distribution. We prove that the proposed contracts can realize the perfect coordination of the supply chain and analyze how the proposed contracts affect the members' decisions. The theoretical results show that, by tuning the option price or buyback price, the supply chain profit can be arbitrarily split between the members, which is a desired property for supply chain coordination. Compared with the standard option and buyback contract, the proposed contract results in a greater supply chain profit and achieves Pareto improvement for the supply chain members. Furthermore, extending the baseline model focusing on price-independent demand to the case of price-dependent demand, we show that the proposed contract still can achieve supply chain coordination. Numerical examples are also conducted to complement the theoretical results.</p>

Evaluation of the Reverse Mortgage Option in Korea: A Long Straddle Perspective

This study explored the option value embedded in a reverse mortgage in Korea through an empirical analysis, using the Black–Scholes option-pricing model. The value of a reverse mortgage is affected by the variation in house prices. However, older homeowners using reverse mortgages are able to choose this option due to the unique characteristics of reverse mortgages, such as non-recourse clauses or being able to redeem the loan. This paper found the following results. First, the call option value is 5.8% of the house price at the age of 60, under the assumption of a KRW three hundred million house value, while the put option value is only 2.0%. Contrary to what it is at sixty years of age, only the call option value will remain when the homeowner reaches the age of 80. Second, this article analyzed the sensitivity of the key variables of real-option analytical models, such as the change of the exercise price, the change of the risk-free rate, volatility, and maturity, on the option value of a reverse mortgage. The sensitivity results of the key variables supported economic rationales for the option pricing model.

Geometric Asian barrier option pricing formulas of uncertain stock model

Abstract In the high-risk modern financial market, option is an effective tool to hedge the risks caused by uncertain demand, the fluctuation of price and foreign exchange rate, because the option can provide the holder with an entitlement to sell or purchase an asset with an exercise price. The acquisition of this entitlement requires the investor to pay option fee, which raises the option pricing issue. This article analyzes how to price Geometric Asian barrier option for uncertain stock model, where barrier option becomes activated or inactivated depending on whether a given barrier level is hit. Here, we suppose that stock price obeys an uncertain differential equation, based on which the pricing formulas of Geometric Asian barrier option are discovered. Furthermore, to express how to use the pricing formulas to calculate corresponding option prices, some numerical examples are given.

Pricing warrant by using binomial model: comparison between historical and implied volatility

A warrant is a security that allows the holder to buy and sell the underlying share at a fixed price until expiry date. Warrant price will always fluctuates since the underlying share also fluctuates. Hence, determining the warrant price is the main problemamong the investors in Malaysia. This research is focusing on pricing the warrant for five companies that were listed in Bursa Malaysia. The companies were chosen randomly from UiTM DataStream. The selected companies were Boon Koon Sdn Bhd, Hovid Bhd, Kelington Bhd, ML Global Bhd and Tropicana Corporation Bhd. The data contained underlying share, interest rate, exercise price and actual warrant price. This research aims to define the price of warrant by using Binomial model. Historical volatility and implied volatility were used in this research whereby volatility is the movement of the underlying share price. This research aims at comparing the actual warrant price with the calculated warrant price. The data were computed manually by using Microsoft Excel and the comparison was made between the two type of volatilities to give the nearest value of calculated warrant price to the actual warrant price. The nearest value was assumed the best value for this research. The result was made by analyzing the line graphs and comparing between historical volatility and implied volatility with actual warrant price. Mean Square Error wasused to support the results that were obtained from the line graphs. In the end, impliedvolatility yielded better results compared to historical volatility.

Option Contract Design for a Multi-period VMI Supply Chain

This paper studies the role of option contracts in a multi-period VMI supply chain consisting of one supplier and one retailer, where an emergency production is allowed to be carried out to replenish unmet demand. By using dynamic programming approach, we formulate two groups of recursive models to characterize the optimal production and ordering policies of two members without and with option contracts, and provide a tractable algorithm to approximate the corresponding policy parameters in two cases. By benchmarking the case without option contracts, we prove that the supplier’s service level in each period is always higher with option contracts than without them. In addition, the supplier is always better off with option contracts than without them. However, the retailer prefers option contracts when the option or exercise price is low, while prefers wholesale price contracts when the option or exercise price is high. Moreover, through the numerical examples, we find that the decisions and performances of two members are decreasing in the demand risk. Finally, we derive the explicit condition on which option contracts can help the multi-period VMI supply chain achieve the optimum under the stationary parameter situation.

Coordination of elderly healthcare service supply chain with information asymmetry: Designs of option contracts under different demand distribution statuses

This paper studies the issue of demand information asymmetry in an elderly healthcare service (EHS) system represented by a two-echelon elderly healthcare service supply chain (EHSSC) comprising an elderly service integrator (ESI) and a service provider (ESP). The goal of the ESI is to decide on how much service capacity is required for placing orders to the ESP, who directly serves the customers. Considering discrete and continuous demand distribution statuses, a centralised model with symmetric demand information and decentralised models with asymmetric demand information are developed to analyse the optimal ordering decisions and discuss the influence of information asymmetry. Furthermore, option contracts are applied to help coordinate the supply chain under asymmetric demand information based on different demand distribution statuses. Optimal option contract menus are designed for the ESP to promote the information sharing. Results show that the option contract can coordinate the EHSSC with asymmetric demand information under both discrete and continuous demand distribution statuses. The exercise price will be higher under lower demand information than that under higher demand information and the transfer payment will be less under lower demand information than that under higher demand information. Moreover, although the ESI has demand information superiority and can make use of opportunistic behaviour to maximise its own profit, the ESP as the leader can design the option contract to incentive the ESI to achieve true information sharing, and even obtain nearly all of the channel profit.