Option Contracts Research Articles

Funding allocations for disaster preparation considering catastrophe insurance

In disaster management, material reserves are defined by uncertain demand. Overstock may lead to wasted funds, while shortages increase purchase pressures in the post-disaster environment. The funding allocation for pre disaster reserve and post disaster procurement is a dilemma. Catastrophe insurance is intended to moderate this dilemma. The relief organization is intended to insure against the surge in demand that accompanies disaster, which may require it to purchase a large amount of materials urgently post disaster. This study develops a funding allocation optimization model for disaster response planning and preparedness, with the added leverage of catastrophe insurance. The goal of this paper is to determine the relief organization's optimal allocation of funds for material reserve, insurance premiums and possible post-disaster purchases to minimize long-term total relief costs. We model the problem as a two-stage robust optimization model designed to minimize the overall costs, and adopt an efficient column and constraint generation algorithm to calculate it. Using data from the flood disasters of Heilongjiang, China, some of the scenarios indicate a reduction in the government's relief costs by adopting insurance instead of applying option contract or just returning unused relief supplies. Our study confirms the advantages of catastrophe insurance in leveraging capital, and reducing disaster material overstocks and insufficient risks.

How a novel option contract helps a green product to enter a traditional product's retailing channel: A mathematical modeling approach

Multi-sourcing is a practical strategy in retail channels that allows retailers facing uncertainties to respond more effectively to consumers' needs by distributing market demand across multiple supply sources. In this respect, this research investigates a price-setting retailing channel, including two manufacturers (a traditional manufacturer and a green manufacturer) and one retailer where end-of-life products can be collected. The retailer faces an uncertain price-dependent demand and sets orders from both supply directions based on a low-cost ordering approach. The primary purpose of this study is to develop an optimal solution to allow the green product to enter the retailing channel of the non-green product. Accordingly, this research develops and compares two different contractual mechanisms from the standpoint of the green manufacturer/retailer and the supply chain (SC): (1) a penalty-based contract and (2) a modified call option contract mixed with a cost-sharing mechanism. The main contribution of the current paper is to investigate an option contract for the effective management of a closed-loop supply chain and combine it with a cost-sharing contract as a new approach. Another contribution is that the developed model considers two practical channels for collecting and returning obsolete products to the green manufacturer: (1) the retailer is responsible for collecting and returning obsolete products, and (2) collecting and returning obsolete products is outsourced to a third-party logistics provider (3PL). Eventually, the models' efficiency is verified by investigating different numerical experiments, discovering that the proposed reservation-based contract outperforms the penalty-based contract for both parties' profitability and retailing channel's improvement. Besides, the present study finds that hiring 3PL significantly increases the green manufacturer's profit compared to other scenarios.

PENGGUNAAN METODE SIMULASI QUASI MONTE CARLO DENGAN BARISAN QUASI ACAK VAN DER COURPUT DALAM MENENTUKAN HARGA OPSI EROPA

An option is a right by a person or institution to sell or buy an investment instrument at a certain price for a certain period. The point of view for way an option is exercised, there are two types of options known today, namely European options and American options. European options are characterized by option contracts that can only be exercised at the expiration date of the option. American options are indicated by option contracts that can be exercised at any time within the validity of the option contract. There are several methods that can be used in determining option prices, including the Black Scholes method which can be used to calculate the standard price of options. Monte Carlo simulation is a method that gives all possible values of a variable using the average as an estimator of its exact value. Quasi Monte Carlo simulation is an alternative to Monte Carlo simulation which uses quasi-random sequences instead of random numbers. In this article, the quasi-random sequence used is Van der Courput. Calculate option prices with Monte Carlo simulation and Quasi Monte Carlo simulation using MATLAB.

Supply Chain Coordination under Carbon Emission Tax Regulation Considering Greening Technology Investment.

In this paper, we firstly derive the optimal strategies, including greening technology investment, production volume and order quantity decisions with stochastic demand, for the emissions-dependent supply chain composed of one manufacturer and one retailer. Then, an advance purchase discount (APD) contract and an option contract are applied to coordinate the supply chain. Moreover, an innovative prepayment-based option (PBO) contract is designed based on an APD contract and an option contract. We discuss the cash flow, the inventory risk allocation and the impacts of carbon emission tax under each contract. It is found that considering improving cash flow, preselling (or option selling) as a means of supporting the manufacturer with sufficient cash flow will help expand production and invest in greening technology. From the perspective of avoiding inventory risk, the APD contract benefits the manufacturer while the option contract benefits the retailer. However, the PBO contract generates intermediate allocations of inventory risk between manufacturer and retailer.

How to promote the widespread commercial adoption of photovoltaic microgrids under investment uncertainty? A real options analysis in China

Microgrids can integrate the production and consumption process of renewable energy and realize the sustainable development of power systems. However, it remains difficult to promote the widespread commercial adoption of photovoltaic microgrids due to high costs. This study develops a real options model for it to assess peak-valley electricity prices and electricity price subsidies under the uncertainties in the initial investment dynamic. The adjustment mechanism is also established in the real options model to analyze the tendency of incentive policies changing with uncertainty. The results demonstrate that the optimal electricity price subsidies of 31 provinces in China range from 0.30 RMB/kWh to 1.05 RMB/kWh, and the optimal rates of peak-valley price range from 3.09 to 6.32. On this basis, we conduct a sensitivity analysis of optimal electricity price subsidy and peak-valley price rate and find that the threshold goes down significantly as the cost goes down. However, rapid cost variations and fluctuations make developers hesitate to invest, which will seriously hinder the widespread commercial adoption of PV microgrids. This study extends the understanding of participants' strategies in a dynamic framework by analyzing the impacts of uncertainty on investment decisions. We suggest developers pay attention to the changes in the market and reduce investment risks by signing option contracts. A stable investment market corresponds to smaller peak-valley price rates and less electricity price subsidies. The policy-maker should provide flexible and efficient incentives depending on the application scenario. It is also suggested that in areas lacking solar resources, the government should not only speed up the establishment of peak-valley electricity prices but also provide long-term subsidies.

How the Real Option Reduces Risks in Producing Film Sequels

The film industry history can be traced back to the late eighteenth century when people began to realize the necessity of entertainment. After years of development, more and more people start to pay for watching films, which generates a tempting revenue for the film industry and further helps the industry attract more investment. To handle the risk of investment, signing an option contract and using real options can help investors make decisions more rationally. In this paper, the author will focus on using option theories to reduce risks by purchasing sequel rights. It provides a sample of reducing risks for investment in the film industry and arbitrage from undervalued sequel rights, which can be imitated in similar conditions.

Production and procurement plans via option contract with random yield and demand information updating

We investigate the production and procurement plans in a two-echelon supply chain consisting of a supplier with random yield and a retailer with stochastic demand. As the production lead time is long, the retailer would purchase options from the supplier to reserve products in advance, and then exercises options or adopts instant order to respond to market changes when demand information is updated. To provide timely order fulfilment, the supplier adopts regular and emergency production policies before and after demand information updating, respectively. We analyze the supply chain coordination problem for two cases: perfect and imperfect market signal. Our study show that a pure option contract only can coordinate supply chain with perfect market signal. For the case of imperfect market signal, we introduce a novel option contract with buyback mechanism to achieve supply chain coordination. Although conventional wisdom shows that such a responsive procurement plan with demand information updating only benefits the retailer while always hurts the supplier, we obtain a different conclusion by demonstrating that the supplier’s performance is improved by demand information updating in the presence of random yield. The intuition is that in face of random yield and demand information updating, the supplier would act conservatively to shed part of the overproduction risk by regular production, and then avoid underproduction risk by emergency production. This reactive production plan with random yield and demand information updating is new and only becomes dominant in some certain conditions. Numerical examples are presented to illustrate theoretical results.

A choice-based optimization approach for contracting in supply chains

We consider a supplier-buyer supply chain. The buyer holds private forecast information (high/low), and the supplier offers a menu of capacity reservation contracts to align incentives. We analyze how the menu of contracts should be adapted when lifting the assumptions that buyers act rationally and/or that buyers’ utility is deterministic. We employ a novel choice-based optimization approach that integrates a multinomial logit model (capturing the buyer’s contract choice behavior) with a mixed-integer nonlinear program. The choice-based optimization model can be solved with off-the-shelf solvers and is therefore ready to use by management. We further derive qualitative insights on how to adapt existing contracts in a numerical study. We show that cutting off low-demand buyers, reducing reservation fees in a specific manner and introducing more contract options may increase suppliers’ and supply chains’ performance.

A New Look at the Swing Contract: From Linear Programming to Particle Swarm Optimization

As the energy market has grown in importance in recent decades, researchers have paid increasing attention to swing option contracts. Early studies evaluated the swing contract as if it were a financial derivative contract, by ignoring its storage constraints. Aided by recent advances in artificial intelligence (AI) and machine learning (ML) technologies, recent studies were able to incorporate storage limitations. We make two discoveries in this paper. First, we contribute to the literature by proposing an AI methodology—particle swarm optimization (PSO)—for the evaluation of the swing contract. Compared to the other ML methodologies in the literature, PSO has an advantage by expanding to include more features. Secondly, we study the relative impact of the price process (exogenously given) that underlies the swing contract and the storage constraints that affect a quantity decision process (endogenously decided), and discover that the latter has a much greater impact than the former, indicating the limitation of the earlier literature that focused only on price dynamics.

VON WEB 1.0 BIS ZUM METAVERSUM - Die Revolution des Internets

This study discusses developments and innovations from the origins of the Web to the very latest type and future vision of the metaverse. As is well known, the Internet has long been more to consist only of texts and images. The web we know today has taken on new dimensions with the development of new technologies such as Rirtual reality, Augmented Reality, and Mixed Reality. These new technologies and the metaverse, which is currently in the hype, show that we can expect a world in which we can find more than just images on websites. A world where people can interact with 3D images using avatars and perform actions that can be done in the real world. A world full of digital payment methods, smart digital contract options, and digital property rights. It also showed how the development of the Internet can be reflected on important aspects of life as well as society in general. Starting from individuals, from economic systems to the response of states. Significant developmental steps from Web 1.0 to the implementation of the idea of the metaverse are explained, fundamental questions are clarified and essential similarities and differences are discussed.

An accurate approximation to barrier option prices with discrete fixed-amount dividends: Nonlinear dynamics

While the asset usually pays discrete fixed-amount dividend in real markets, it is still an open problem on how to accurately and efficiently value barrier options under such circumstances where the underlying price process becomes nonlinear. This paper presents an accurate analytical approximation for barrier option prices, which can be applied no matter the number of dividends that are to be paid during the lifetime of the option contract. The resulting formula only involves the multivariate normal distribution function, which is very efficient to implement in practice.

Price discovery in the CSI 300 Index derivatives markets

AbstractThe price discovery in finance markets has been the focus of many researches. On the basis of 1‐min high‐frequency returns, this paper sets out to examine the dynamics of price discovery between the China Securities Index 300 index and its derivative products: the futures, the index exchange‐traded fund (ETF), and the ETF options. Nonparametric nonlinear method thermal optimal path method is adopted in this study. The empirical evidence shows a clear difference in price discovery ability concerning the three products under investigation, and their rank (sorted by strength) can be presented as options, futures, and ETF. In addition, the leading phenomenon has been verified by the regression method. Furthermore, we find that out‐of‐the‐money options have the strongest price discovery ability among different moneyness option contracts. On this basis, we find that leverage is an important factor affecting the ability of price discovery.

Efficiency of Black and Scholes Model for Pricing Options at Indian Stock Market

Black and Scholes model was developed for valuing the options in derivatives market in the year 1973. This model became the prime tool for pricing options but because of its deficiencies it forced researchers to find out new model for pricing options (Rubinstein, 1985; Hull and White, 1987; Wiggins, 1987; Dumas, Fleming and Whaley, 1998). Option pricing is proven to be very challenging task during high volatility situations whereas Black and Scholes option pricing model is not proven a successful predictor for determining approximate price of the options. Even empirical evidences support that Black and Scholes model produces some biasness in estimating the prices. The main objective of this paper is to find out the efficiency of the Black and Scholes option pricing model for predicting the option prices at Indian Stock Exchanges for which data set from Indian Stock Exchanges will be chosen, market price of option contracts are considered as sample for the year 2008-2015. The actual market price will be compared with the price derived with the help of Black and Scholes model formula.

Warranty and maintenance service contracts for repairable products

This paper deals with warranty and maintenance service contracts for repairable products, which involve three parties – i.e., Manufacturer, Service Agent (SA), and Consumer. Six maintenance service contract (MSC) options are proposed and examined, which include an option where the manufacturer sales a package of a product and maintenance services (known as a product service system). The study of MSCs is done from three different perspectives — the Manufacturer, the SA, and the customer. The goal for the study is to determine the optimal price of each option and to select best option (for the consumer), which maximize profits which are a common interest of the three parties involved. The decision problems for the three parties are modeled using a Stackelberg game theory formulation. As the decision problems are interdependent, then the bi-level optimization formulation is used to find best solutions. A genetic algorithm is used to obtain the best solution (including the best price for each option offered and the best option for the consumer). Numerical examples examining six cases are presented to illustrate the best solution.

Choosing the right options trading strategy: Risk-return trade-off and performance in different market conditions

The investment decisions are subjected to risk and return of the financial asset. Options strategies help employ a suitable strategy to balance the risk-return trade-off. The study analyzes the risk-return trade-off of the long straddle, long strangle, long call butterfly (LCB), short straddle, short strangle, and short call butterfly (SCB) strategies. Moreover, it measures the impact of strategy risk and options premiums on strategy return using panel data analysis. Additionally, the study evaluates the performance of options strategies using the excess returns to risk approach under neutral and volatile market conditions. This paper considered companies of top-six sector indices of the National Stock Exchange from 2009 to 2020 and collected data of 18,720 option contracts and 3,744 observations for each strategy (22,464 observations). The study revealed that risks of long straddle and long strangle strategies have a positive impact, and options premiums negatively influence their payoff. ATM call premiums positively affect LCB payoff, while OTM and ITM call premiums positively influence SCB payoff. However, the risks of butterfly strategy did not influence its payoff. The risk of short straddle and short strangle strategies negatively influenced the payoff and were considered riskier strategies. Moreover, short straddle and short strangle strategies enhanced excess returns under both market conditions. The results would help the investors in choosing the appropriate strategy by analyzing the impact of risk on the payoff and the ability to enhance excess returns to the risk of various options strategies to incorporate in their investment.

Option Contracts in Fresh Produce Supply Chain with Freshness-Keeping Effort

This study investigates a supply chain of fresh produce with consideration of option contracts and where stochastic market demand depends on freshness-keeping effort. Firstly, we investigate a benchmark scenario of an integrated supply chain with freshness effort and consideration of decreases in both the quality and quantity of produce while in the supply chain. Secondly, we introduce call, put, and bidirectional option contracts to mitigate risks of the retailer. A call option contract can reduce the underage risk, while a put option contract can reduce the overage risk, and a bidirectional option contract can reduce bilateral risks. We derive the optimal ordering decisions and freshness-keeping effort for a retailer in a supply chain of fresh produce with option contracts, and the conditions for achieving coordination of the supply chain. We find that the bidirectional option results in the highest option price and lowest option order quantity, while the call option results in the lowest initial order quantity and the put option results in the highest initial order quantity. Finally, numerical examples are given to demonstrate the impacts of various parameters on optimal decision-making. This paper provides managerial insights for reducing risk in fresh produce supply chains.

How increasing relative risk aversion affects retailer orders under coordinating contracts

We analyze how risk aversion affects the order-quantity decisions of a retailer for two coordinating contracts - buyback and real option. The retailer faces uncertain customer demand and makes a single order-quantity decision to maximize expected utility. We show that for a retailer with increasing relative risk aversion, orders decline in the expected profit share of the supply chain, which is determined by the parametrization of the contract. We use an exponential utility function to model a retailer with increasing relative risk aversion and test our model on existing experimental data as well as on data from a validation experiment. In our validation experiment, we link order quantities to certainty equivalents and establish risk aversion as an underlying cause for the deviation from profit maximizing quantities. Additionally, we find that under real option contracts, risk averse retailers order more than under buyback contracts.

Comparative analysis of an option to conclude an agreement and an option agreement

In this paper, an option to conclude a contract and an option contract are considered in a comparative aspect. The object of the study is an option relationship or a relationship that develops as a result of the application of the norms of civil legislation on options. The subject of the study is the norms of the Civil Code of the Russian Federation governing the conclusion of an agreement on the granting of an option to conclude a contract and an option contract. The main purpose of the work is to compare the option to conclude an agreement and an option agreement, to identify common and distinctive features of the mechanisms under Articles 429.2 and 429.3 of the Civil Code of the Russian Federation. В В В The scientific novelty of the study lies in the fact that in this paper a comparative analysis of the option to conclude a contract and an option contract is carried out. The norms governing the options constructions under consideration have been subjected to a detailed study and analysis. The results of the study, which reflect the scientific novelty of the work, are manifested in the differentiation of two adjacent options as common constructions. The paper considers the option to conclude a contract and an option contract in a comparative aspect, highlights the adjacent and distinctive features of both designs, concludes about the common purpose of option designs, about the features of mechanisms, as well as the need to improve Articles 429.2 and 429.3 of the Civil Code of the Russian Federation.

The Concept of Hedging Instrument Forward In Islamic Economic Perspective

This research aims at explaining more in-depth about Islamic hedging related to the problem of muwa’adah status in Islamic hedging. The use of muwa’adah as an Islamic hedging instrument which promises to carry out transactions in the future, actually still becomes a subject of debate since there are some different opinions about whether or not it is permissible to carry out the concept of muwa’adah in a transaction. This research is descriptive qualitative research and uses qualitative data analysis, by conducting a direct analysis of the hedging scheme through the process of data reduction, data display, and verification. The results of this study reveal that in sharia hedging, swap and forward contracts should not be used, because swaps and forwards contain elements of usury. While the option contract contains speculation (maysir). If the forbidden aspects (haram) in ‘forward’ and ‘swap’ instruments are analyzed, generating al-sharf al-ajil and maysir (khathar/speculation), then the alternatives are 1) forward agreement by way of a price-fixing agreement; 2) bay’ al-iltizam; 3) bay’ al-‘urbun; and 4) al-bay’ bi al-shart.

A stochastic programming model for dynamic portfolio management with financial derivatives

Stochastic optimization models have been extensively applied to financial portfolios and have proven their effectiveness in asset and asset-liability management. Occasionally, however, they have been applied to dynamic portfolio problems including not only assets traded in secondary markets but also derivative contracts such as options or futures with their dedicated payoff functions. Such extension allows the construction of asymmetric payoffs for hedging or speculative purposes but also leads to several mathematical issues. Derivatives-based nonlinear portfolios in a discrete multistage stochastic programming (MSP) framework can be potentially very beneficial to shape dynamically a portfolio return distribution and attain superior performance. In this article we present a portfolio model with equity options, which extends significantly previous efforts in this area, and analyse the potential of such extension from a modeling and methodological viewpoints. We consider an asset universe and model portfolio set-up including equity, bonds, money market, a volatility-based exchange-traded-fund (ETF) and over-the-counter (OTC) option contracts on the equity. Relying on this market structure we formulate and analyse, to the best of our knowledge, for the first time, a comprehensive set of optimal option strategies in a discrete framework, including canonical protective puts, covered calls and straddles, as well as more advanced combined strategies based on equity options and the volatility index. The problem formulation relies on a data-driven scenario generation method for asset returns and option prices consistent with arbitrage-free conditions and incomplete market assumptions. The joint inclusion of option contracts and the VIX as asset class in a dynamic portfolio problem extends previous efforts in the domain of volatility-driven optimal policies. By introducing an optimal trade-off problem based on expected wealth and Conditional Value-at-Risk (CVaR), we formulate the problem as a stochastic linear program and present an extended set of numerical results across different market phases, to discuss the interplay among asset classes and options, relevant to financial engineers and fund managers. We find that options’ portfolios and trading in options strengthen an effective tail risk control, and help shaping portfolios returns’ distributions, consistently with an investor’s risk attitude. Furthermore the introduction of a volatility index in the asset universe, jointly with equity options, leads to superior risk-adjusted returns, both in- and out-of-sample, as shown in the final case-study.