Portfolio Of Options Research Articles

How CEO Wealth Affects the Riskiness of a Firm

The objective of this paper is to analyze the relationship between the ownership level of managers and the risk averse behavior of the firm. We measure the ownership level of the managers by the ratio of their ownership of the company relative to their total wealth for a sample of 69 individuals from the Forbes 400 list of the wealthiest individuals in the world for the period from 2001-11 using an unbalanced panel data analysis. The dependent variable is the Altman Z-score of each firm and we further test these relationships using financial leverage. The independent variables are delta and Vega of the option portfolio of the manager, R&D for the firm, total assets, the age of the manager, the tenure of the manager, stock holding of the manager, CEO/Chair duality of the manager and firma age. The Z-score is statistically significantly related to size, CEO age, CEO wealth, and duality. Financial leverage is not statistically significantly related to any of the independent variables.

Improvement of Strategic Management of a Tourism Enterprise in the International Market

The article is concerned with the development of approaches to improving a tourism enterprise’s strategy management in the international market. It was established that the strategic choice in the foreign market should be carried out in line with definite goals and results of environment analysis. It was proved that while setting a tourism enterprise’s international market strategy the enterprise should shift its focus to marketing and, at the same time, to focus on the analysis of rivals. It was determined that instability and risks prevent executives from developing corporate development strategies for the international market simultaneously with the transformation of its corporate structure. A portfolio of strategic options, which a tourism enterprise has chosen, should include not only the elaboration of strategies but also ways of their execution, required resources and risk assessment. It was proved that the implementation of strategic management requires permanent control over this process.

The Pricing of Market and Idiosyncratic Jump and Volatility Risks

This paper analyzes the risk-return relation of different variance components in the cross-section of option and stock returns. Using option portfolios that have a constant exposure to either jump or diffusive risk, I decompose variance risk into four components: market volatility risk, idiosyncratic volatility risk, market jump risk, and idiosyncratic jump risk. The lion’s share of stocks' variance risk is paid for the idiosyncratic components, with Sharpe Ratios of -3.44 for idiosyncratic jump risk and 2.15 for idiosyncratic volatility risk. While all four components are at play when stocks earn negative returns, idiosyncratic jump and volatility risks are most important to explain positive returns. In addition, stocks that have higher idiosyncratic jump risk premiums earn higher future returns.

(Invited) Hydrogen and Fuel Cells Enabled through the U.S. Department of Energy

Today the technology around generating efficient and sustainable energy is rapidly evolving and hydrogen and fuel cells are emerging, versatile examples within a portfolio of options. Through the dedication and contributions of numerous researchers funded by the U.S. Department of Energy’s (DOE) in collaboration with the private sector, hydrogen and fuel cell technologies are now a commercial reality. This presentation will cover the history of DOE’s efforts along with examples of breakthroughs by leading contributors in electrochemistry. This is an exciting time in the fuel cell industry with over ten thousand commercial fuel cell vehicles sold or leased, hundreds of fueling stations worldwide, and more than a quarter of a million stationary fuel cells providing clean, reliable power. DOE’s Fuel Cell Technologies Office (FCTO) within the Office of Energy Efficiency and Renewable Energy (EERE) addresses key technical barriers faced by hydrogen and fuel cells through a comprehensive portfolio of early-stage research and development (R&D) with the potential to meet technical and cost targets that enable competitiveness with incumbent technologies in the market, aligned with national priorities. The presentation will cover technology status versus targets as well as an overview of the global landscape in hydrogen and fuel cells. International government collaborations through partnerships such as the International Partnership for Hydrogen and Fuel Cells in the Economy (IPHE) are contributing to progress and can enable large-scale deployment worldwide. The talk will cover the broad context of hydrogen within the energy system – the DOE’s H2@Scale initiative which will enable innovations to generate cost-competitive hydrogen as an energy carrier, coupling renewables, as well as baseload power generation, enhancing resiliency and avoiding curtailment. Hydrogen can be stored, distributed and used as a fuel or feedstock in transportation, stationary or back-up power and multiple industrial sectors, while creating an additional revenue stream for existing baseload and variable generation assets. The presentation will also provide an overview of national and regional efforts within the United States related to hydrogen and fuel cells and potential opportunities within the region.

Understanding P3s

Public–private partnerships, or P3s, are often not well understood—the key word being “well.” My observation is that they are understood to a degree by most of us, and one common perception is that they are complicated. P3s are complicated in a way that is different from other, more traditional, project delivery methods used in the water sector, especially those related to financing. The traditional methods of investing in and financing water infrastructure development certainly are not simple. Nonetheless, we may feel more comfortable using them because they are what we're used to, and we already understand the pros and cons. Still, it took time for us to learn about these methods, which once were new and now are considered traditional. And while the traditional methods seem to meet our needs, one question to ask is whether they are the best choice in all situations. Two years ago, AWWA started collaborating with groups interested in expanding the understanding of how P3s work. We have held a series of Round Table Discussions, where stakeholders such as utilities, bond-rating agencies, and private-sector interests can openly explore the benefits, risks, and opportunities of various project delivery and financing models. These include traditional methods, P3s, and other approaches. For the past five years, AWWA has reported in its State of the Water Industry Report that the number one and number two concerns of the water sector are (1) renewal and replacement of aging water and wastewater infrastructure and (2) financing for capital improvements. Knowing this, AWWA was motivated to support round-table educational discussions, with the vision of helping to put the water sector in the best position to make informed financial choices. As it relates to P3s, the 2019 State of the Water Industry Report tells us that 70% of utility respondents are not considering a P3 alternative and that 21% are already involved, plan to use, or are considering using a P3. Interestingly, 9% of utility respondents indicated that they are currently partnering with other utilities to share resources. AWWA recently partnered with Ernst & Young Infrastructure Advisors LLC to conduct a survey, asking AWWA's membership about P3s. The report, To P3 or not to P3, is available electronically on AWWA's website (https://bit.ly/2GjCGZr). There were 166 responses from North American organizations, of which 77% were utilities. The survey clarified that P3s are not a form of privatization, are not appropriate for every project, and do not represent new sources of revenue. So, where does that leave us? Taking all of these survey results together, it seems reasonable to say that P3s will continue to be a part—perhaps a small but strategic part—of the portfolio of options used by utilities for infrastructure development and financing. Projects that will likely lend themselves best to a P3 will be those that involve development of new assets that have technical requirements with which a utility is not familiar. To be successful, a utility will need to invest time and effort in building internal capacities to properly enter into and manage a P3 agreement. The answer, then, to what the best method is for project delivery and finance? It depends.

Information Uncertainty and Implied Volatilities

In the U.S. stock and options markets from January 1996 to December 2013, we examine whether information uncertainty explains the discrepancy between historical and implied volatilities in Goyal and Saretto (2009). In addition, we clarified the impact of the uncertainty on the stock market as well as on the options market. In particular, we calculated the performance of our zero-investment option portfolio selling option straddle positions of stocks in the first decile with the lowest discrepancy between the two volatilities and purchasing option straddle positions in the last decile with the highest discrepancy. Moreover, we estimate the returns of these portfolios held by until to the earnings announcement days as well as the returns of the portfolios held by one month. In our results, changes in information uncertainty are in tandem with changes in implied volatility and reduce the predictability of implied volatility for the future realized volatility. Additionally, we show an insignificant change in volatility skew during the time of a significant change in volatility implied from ATM options. Conclusively, we provide novel evidence that the uncertainty of information concerning a firm’s fundamental underlying volatility proposed in Hirshleifer (2001) significantly affects implied volatility.

Stock Return Autocorrelations and the Cross Section of Option Returns

We present a new finding that the return autocorrelation of underlying stock is an important determinant of expected equity option returns. Using an extended Black-Scholes model incorporating the presence of stock return autocorrelation, we show that expected returns of both call and put options are increasing in return autocorrelation coefficient of the underlying stock. Consistent with this insight, we find strong empirical support in the cross-section of average returns of equity options. Average returns of calls and puts as well as average returns of straddles all show monotonically increasing relationship with the degree of underlying stock's return autocorrelation coefficient. Additional equity option portfolio analysis shows that the information on stock return autocorrelation helps investors to significantly improve the out-of-sample performance of their portfolios.

Volatility-of-volatility and the cross-section of option returns

This paper presents a robust new finding of a significant negative relation between equity option returns and the volatility-of-volatility (VOV). After controlling for numerous existing option and stock characteristics, the VOV effect remains significantly negative. It also survives many robustness checks. A conceptual model provided reveals the pricing mechanism behind the VOV effect. The high-low return spread on option portfolios sorted on VOV cannot be explained by standard risk factors, and survives double sorting using a variety of control variables.

Electricity rates for the zero marginal cost grid

The electricity industry is rapidly changing: costs are increasingly dominated by capital and technology is turning loads into resources. This is similar to the early days of the Internet. Building on rate-structures used in the communications industry, utilities of the future should offer customers a portfolio of service contract options that provide a signal to the utility regarding the type and amount of infrastructure that should be deployed.

Research on value and factors of the guarantee payment in the energy performance contracting in China

Mistrust of the Energy Using Organisation (EUO) in Energy Services Company (ESCO) is a key factor that hinders the development of Energy Performance Contracting Projects (EPCPs) in China, especially the EPCP is the shared savings type. A payment guarantee that is able to hedge the credit risk of the EUO is the rational choice for the ESCO. Considering an EPCP payment guarantee with a limit on the total amount that is essentially a multi-period European put option portfolio with multiple uncertain exercise prices that the guarantor sells to the ESCO, this paper constructs a valuation formula of an EPCP payment guarantee, in which the exercise price follows the geometric Brownian motion with a Poisson jump, and analyses the effects of the factors on the value of the payment guarantee. The results revealed the following. First, the value of the payment guarantee is affected by the total guaranteed amount, uncertainty in ESCO’s revenue, and uncertainty in EUO’s net cash flow, and consideration of the impact of unexpected shocks on the exercise price can avoid overrating the value. Second, the value of the payment guarantee for each period within the scope of the full guarantee increases with an increase in the ESCO’s initial revenue flow, proportion of the revenue sharing and expected revenue growth rate, and it decreases with an increase in the risk-adjusted discount rate and EUO’s initial net cash flow; the value of the payment guarantee for each period within the scope of the full guarantee first decreases and subsequently increases with an increase in the risk-level of ESCO’s revenue and the EUO’s net cash flow. Third, the results of the Sobol’s sensitivity analysis indicate that, within the scope of the full guarantee, the ESCO’s initial revenue flow, proportion of the revenue sharing, the risk-adjusted discount rate and EUO’s initial net cash flow play relatively important roles in changing the EPCP payment guarantee and its exercise prices. According to the above conclusions, the payment guarantee contract can provide the ESCO with a basis for decision-making in the formulation of a strategy to safeguard energy conservation revenues in accordance with the relationships embodied by the value of the payment guarantee. Finally, the policy recommendations about relieving the mistrust between EUOs and ESCOs are provided.

Valuing portfolios of interdependent real options under exogenous and endogenous uncertainties

Although the value of portfolios of real options is often affected by both exogenous and endogenous sources of uncertainty, most existing valuation approaches consider only the former and neglect the latter. In this paper, we introduce an approach for valuing portfolios of interdependent real options under both types of uncertainty. In particular, we study a large portfolio of options (deferment, staging, mothballing, abandonment) under conditions of four underlying uncertainties. Two of the uncertainties, decision-dependent cost to completion and state-dependent salvage value, are endogenous, the other two, operating revenues and their growth rate, are exogenous. Assuming that endogenous uncertainties can be exogenised, we formulate the valuation problem as a discrete stochastic dynamic program. To approximate the value of this optimisation problem, we apply a simulation-and-regression-based approach and present an efficient valuation algorithm. The key feature of our algorithm is that it exploits the problem structure to explicitly account for reachability – that is the sample paths in which resource states can be reached. The applicability of the approach is illustrated by valuing an urban infrastructure investment. We conduct a reachability analysis and show that the presence of the decision-dependent uncertainty has adverse computational effects as it increases algorithmic complexity and reduces simulation efficiency. We investigate the way in which the value of the portfolio and its individual options are affected by the initial operating revenues, and by the degrees of exogenous and endogenous uncertainty. The results demonstrate that ignoring endogenous, decision- and state-dependent uncertainty can lead to substantial over- and under-valuation, respectively.

Valuation and applications of compound basket options

AbstractThis study investigates compound basket options, which are options on portfolios of options. Although they may be new to financial markets, they are available as equity basket options, equity spread options, stocks of holding companies, and collateralized debt obligations. Using moments of portfolio values, we provide formulas for pricing compound basket options. According to numerical analysis, a lower bound and a weighted average of bounds yield relatively small errors. Additionally, ignoring the compound feature increases the pricing error of equity basket options because the feature captures the capital structure and leverage effect of stock prices.

Uncertainty in risk issues for carbon capture and geological storage: findings from a structured expert elicitation

Carbon capture and geological storage (CCS) is identified within the portfolio of mitigation options for climate change. Each value chain activity of large scale integrated projects (capture, trans...

Scenario Analysis for Derivatives Portfolios via Dynamic Factor Models

A classic approach to financial risk management is the use of scenario analysis to stress test portfolios. In the case of an S&P 500 options portfolio, for example, a scenario analysis might report a P&L of −$1m in the event the S&P 500 falls 5% and its implied volatility surface increases by 3 percentage points. But how accurate is this reported value of −$1m? Such a number is typically computed under the (implicit) assumption that all other risk factors are set to zero. But this assumption is generally not justified as it ignores the often substantial statistical dependence among the risk factors. In particular, the expected values of the non-stressed factors conditional on the values of the stressed factors are generally non-zero. Moreover, even if the non-stressed factors were set to their conditional expected values rather than zero, the reported P&L might still be inaccurate due to convexity effects, particularly in the case of derivatives portfolios. A further weakness of this standard approach to scenario analysis is that the reported P&L numbers are generally not back-tested so their accuracy is not subjected to any statistical tests. There are many reasons for this but perhaps the main one is that scenario analysis for derivatives portfolios is typically conducted without having a probabilistic model for the underlying dynamics of the risk factors under the physical measure P. In this paper we address these weaknesses by embedding the scenario analysis within a dynamic factor model for the underlying risk factors. Such an approach typically requires multivariate state-space models that can model the real-world behavior of financial markets where risk factors are often latent, and that are sufficiently tractable so that we can compute (or simulate from) the conditional distribution of unstressed risk factors. We demonstrate how this can be done for observable as well as latent risk factors in examples drawn from options and fixed income markets. We show how the two forms of scenario analysis can lead to dramatically different results particularly in the case of portfolios that have been designed to be neutral to a subset of the risk factors.

Optimal Decisions of a Supply Chain With a Risk-Averse Retailer and Portfolio Contracts

In this paper, we investigate a supply chain involving one risk-neutral supplier and one risk-averse retailer, where the retailer adopts the conditional value-at-risk (CVaR) criterion as his performance measure. To hedge against high risk, the retailer purchases call options from the supplier to adjust his firm orders. We derive the optimal order and production policies, with and without a call option contract and demonstrate that the call option contract can benefit both the retailer and the supplier. In addition, we also generate insights regarding how the contract parameters, level of risk aversion and shortage cost impact the retailer’s optimal policy, highlighting the importance of considering the risk aversion and shortage cost simultaneously. Finally, we derive the condition for the supply chain to be coordinated and show that compared to non-coordinating contracts, the wholesale price and call option portfolio contracts proposed in this paper can achieve Pareto optimality. Numerical experiments are conducted to demonstrate theoretical results and observations.

Методика оценки рисков вариантов портфелей проектов геолого-разведочных работ нефтегазовой компании

Методика оценки рисков вариантов портфелей проектов геолого-разведочных работ нефтегазовой компании

An option-theoretic model of a reputation network

ABSTRACTThis paper constructs a new theory of social networks based on reputation. The model assumes that reputation is an asset and that individuals connect by buying options on the reputation of others. In networking, individuals construct portfolios of call options to leverage the reputations of others and put options to hedge the connections with others. A network then consists of portfolios of reputation options. The option model confers advantages not present in existing models. First, the payoff to connecting is the payoff on a portfolio of reputation options. Second, the network forms as individuals take option positions; the network evolves as individuals adjust those positions. Third, networking strategies become option strategies. The model allows for insights into network structure, the price of connecting and the value of connecting.

Common Factors in Equity Option Returns

This paper studies the factor structure of the cross-section of delta-hedged equity option returns. We find that a four-factor model explains the cross-section and time-series of equity option returns. Out of the four factors, three are characteristic based factors from the long-short option portfolios based on firm size, idiosyncratic volatility, and the difference between implied and historical volatilities. The fourth factor is the market volatility risk factor proxied by the delta-hedged option return of the the S&P 500 index.

Operational flexibility in forest fire prevention and suppression: a spatially explicit intra-annual optimization analysis, considering prevention, (pre)suppression, and escape costs

Increasing wildfire threats and costs escalate the complexity of forest fire management challenges, which is grounded in complex interactions between ecological, social, economic, and policy factors. It is immersed in this difficult context that decision-makers must settle on an investment mix within a portfolio of available options, subject to limited funds and under great uncertainty. We model intra-annual fire management as a problem of multistage capacity investment in a portfolio of management resources, enabling fuel treatments and fire preparedness. We consider wildfires as the demand, with uncertainty in the severity of the fire season and in the occurrence, time, place, and severity of specific fires. We focus our analysis on the influence of changes in the volatility of wildfires and in the costs of escaped wildfires, on the postponement of capacity investment along the year, on the optimal budget, and on the investment mix. Using a hypothetical test landscape, we verify that the value of postponement increases significantly for scenarios of increased uncertainty (higher volatility) and higher escape costs, as also does the optimal budget (although not proportionally to the changes in the escape costs). Additionally, the suppression/prevention budget ratio is highly sensitive to changes in escape costs, while it remains mostly insensitive to changes in volatility. Furthermore, we show the policy implications of these findings at operational (e.g., spatial solutions) and strategic levels (e.g., climate change). Exploring the impact of increasing escape costs in the optimal investment mix, we identified in our instances four qualitative system stages, which can be related to specific socioecological contexts and used as the basis for policy (re)design. In addition to questioning some popular myths, our results highlight the value of fuel treatments and the contextual nature of the optimal portfolio mix.

Value recovery options portfolio optimization for remanufacturing end of life product

Recovering valuable components from End-of-Life (EOL) product is regarded as a means to extend remaining useful life and reduce production cost of used components in the context of remanufacturing. There are three value recovery options for each component including new, reuse, and reconditioning, making the value recovery of EOL product a complex combinatorial optimization problem. To obtain the optimal value recovery options portfolio of used components and improve the economic benefits from remanufacturing, a multi-objective optimization method of value recovery is applied to the remanufacturing of EOL product. Firstly, an evaluation criterion in terms of quantified damage level and remaining life of used components is established, which aims to identify value recovery options for each used component. Then, the concept of Life Span Equilibrium (LSE) is proposed and a multi-objective optimization model is established, in which LSE, value recovery efficiency, and cost are taken as the objectives. An adaptive Epsilon-dominance based Strength Pareto Evolution Algorithm (AE-SPEA2) is employed to obtain an optimal value recovery portfolio, and its results are compared with an Elitist-based Non-dominated Sorting Genetic Algorithm (NSGA-II) and a Pareto Envelope based Selection Algorithm (PESA-II). Finally, a used lathe (model C6132) is taken as an example to verify the practicality and effectiveness of the proposed method, the results of which indicate that the proposed method is effective in optimizing the value recovery of EOL product.