Portfolio Of Options Research Articles

Tax saving's valuation under its appropiate risk profile: A Contingent Claim Approach

Tax saving’s valuation is crucial for discounted cash flow valuation and WACC estimation. There is an ongoing debate about the appropriate discount rate for tax savings under CAPM approach. On this paper we evaluate tax savings from a contingent claim approach in order to establish a framework which could be compatible with discounted cash flow valuation while being consistent with tax saving’s nature. We present two approach based on contingent claims with continuous real and risk neutral probabilities, and propose a strategy based on sequential portfolios of European options for its valuation. We state that the value of tax savings is the present value of tax savings, and provide a valuation formula that can be integrated with a traditional discount cash flow model under WACC and APV.

The Valuation of Tax Loss Carryforwards

This paper shows that future tax savings from a tax loss carryforward equal a portfolio of options based on the taxable base. Unfortunately, the assumption of a geometric Brownian motion is not applicable for the taxable base since it implies that a positive taxable base, for example, will never become negative and vice versa. Therefore, the famous Black/Scholes formula cannot be used for valuing this portfolio of options. In order to solve this problem, we assume an arithmetic Brownian motion for the taxable base and derive a formula for valuing tax loss carryforwards within a single-period model. In a multiperiod context, a Monte-Carlo simulation based on our findings provides reasonable results. This methodology can also be used to value the tax shields arising from debt if the interest expenses cannot be used in full during the period in which they occur. Our simulation suggests that the assumption that interest expenses are immediately deductable will yield inadequate company values.

Business Cycles and Net Buying Pressure in the S&P 500 Futures Options

Abstract We analyse the cyclical behaviour and intraday pattern of net buying pressure in the S&P 500 futures options market. The results suggest that the net buying pressure of puts is counter‐cyclical and is more intense during contraction periods. The trading profits for selling put options during contraction periods thus far exceed those during expansion periods. Net buying pressure also exhibits an intraday pattern. Trading profits in the early trading sessions are higher than those for the rest of the day. In addition, we show that hourly‐basis hedging yields smaller profits than daily‐basis hedging, which suggests that the trading profits based on daily‐basis hedging may contain a risk premium associated with discretely rebalanced ‘risk‐free’ option portfolios.

Micro Finance for Agriculture in Asia: Can it Deliver?

This paper is an attempt to review limited Asian experience on role of micro finance in agriculture. It details peculiar features of agriculture vs micro finance. Experience in the field indicates that micro- finance can play a crucial role where all round and infrastructure development has taken place in rural areas due to private and government investments or by market forces; where productivity increases in dry land agriculture, in agricultural diversification and in the portfolio of rural livelihood options have occurred; where the risk of investment in agriculture by the poor has been lowered through insurance, irrigation and dry land agriculture technology; where people have market linkages for agricultural products; and where the poor have overcome oppressive relations, which deprive them of access to resources, markets, equal opportunity, management skills and social status. Finally, it is not either or situation, rural sector require finance and it has to be delivered to sustain communities and food security of poor countries.

The Dutch energy transition approach

The article describes the Dutch energy transition approach as an example of an industrial policy approach for sustainable growth. It is a corporatist approach for innovation, enrolling business in processes of transitional change that should lead to a more sustainable energy system. A broad portfolio of options is being supported. A portfolio of options is generated in a bottom-up, forward looking manner in which special attention is given to system innovation. Both the technology portfolio and policies should develop with experience. The approach is forward-looking and adaptive. One might label it as guided evolution with variations being selected in a forward-manner by knowledgeable actors willing to invest in the selected innovations, the use of strategic learning projects (transition experiments) and the use of special programmes and instruments. Initially, the energy transition was a self-contained process, largely separated from existing policies for energy savings and the development of sustainable energy sources. It is now one of the pillars of the overall government approach for climate change. It is a promising model but economic gains and environmental gains so far have been low. In this article I give a detailed description of the approach and an evaluation of it.

Improving the Predictability of Real Economic Activity and Asset Returns with Forward Variances Inferred from Option Portfolios

This paper presents an option positioning that allows us to infer forward variances from option portfolios. The forward variances we construct from equity index options help to predict (i) growth in measures of real economic activity, (ii) Treasury bill returns, (iii) stock market returns, and (iv) changes in variance swap rates. Our yardstick for measuring predictive ability is both individual and joint parameter statistical significance within a market, as well as across a set of markets.

Strategy vs risk in margining portfolios of options

The strategy-based approach to portfolio margining has been used for margining customer accounts for more than four decades. The risk-based approach was proposed in the mid eighties for margining some inventory accounts of brokers but permitted for margining customer accounts only in 2005. This paper presents a computational experiment with the strategy-based approach and the risk-based approach with the purpose of clarifying which one yields lower margin requirements under different scenarios. There exists a widespread opinion, cf. (Reuters 2007; Longo 2007; Smith 2008), that the risk-based approach is always a winner in this competition, and therefore the strategy-based approach must be disqualified as outdated. However, the results of our experiment with portfolios of stock options show that, in many practical situations, the strategy-based approach yields substantially lower margin requirements in comparison with the risk-based approach.

Policy options in a worst case climate change world

Climatic changes more rapid and extreme than assessed by the IPCC cannot be excluded, because of the possibility of positive earth system feedbacks and thresholds. Do today’s policy makers have to take these into account, and if so, are the options different from those considered today? The paper briefly summarizes the types of extreme climatic changes noted in the literature and then evaluates the options to address them in a what-if manner. Different from other studies, which usually look at only one type of measure, we consider a broader portfolio of options: drastic emissions reduction programmes, drawing greenhouse gases from the atmosphere (“carbon dioxide removal”), “emergency cooling” through influencing the radiative balance of the atmosphere (“solar radiation management”), and finally adaptation beyond the options considered seriously today. Politics will have to decide on the choice or mix of “emergency” measures, but research can ensure that such decisions are based on the best scientific information. If through concerted international efforts to mitigate greenhouse emissions low stabilization levels could be reached, such decisions may never have to be made. However, research in support of some form of a “plan B” is now warranted, focusing on those options that have the most positive ratio between potential effectiveness and feasibility on the one hand, and environmental and political risks on the other hand. Such plan should not be limited to one set of options such as geo-engineering and should explicitly take into account not only the relationships between the options but also the wide variety in characteristics of the individual options in terms of effectiveness, feasibility, environmental risks, and political implications.

Flexibility and Games in Strategic Investment

We present a framework for value-based strategic planning combining concepts and tools from strategy and finance. Our ‘Expanded NPV’ framework reconciles flexibility and strategic commitment, viewing strategic planning as managing a portfolio of real options with competitive interactions. The flexibility and strategic value of a business strategy are interwoven with that strategy’s design. We synthesize real options and game theory to evaluate projects or acquisitions. We connect strategic planning and the underlying sources of value creation with the market value of the firm and its three main value components: expected cash flows or assets in place (NPV), flexibility (growth options), and strategic value (moves and games). We develop implications depending on simple or compound growth options, the type and competitive impact of the investment, and relative market power.

The Care Coordination Home Telehealth (CCHT) rural demonstration project: a symptom-based approach for serving older veterans in remote geographical settings

Innovative healthcare delivery strategies are needed to address the healthcare needs of the 3.5 million older veterans living in US rural areas who face unique healthcare delivery challenges, including transportation barriers, poverty, and limited access to health professions and community-based programs. The care coordination home telehealth (CCHT) rural demonstration project was developed to address the mismatch between the timely identification of patient needs and the care delivered by the traditional disease-oriented institutionally-based healthcare delivery system for older rural veterans. The specific objectives were to: (1) serve as a facilitator of primary care; and (2) provide a portfolio of geriatric care management options to increase early detection of symptoms and to encourage adherence to care plans. Participants were recruited based on patterns of high outpatient, inpatient, and emergency care visits; 132 rural older veterans were enrolled. The CCHT applied care management principles to the delivery of healthcare services and used health informatics to facilitate access to evidence-based care. The CCHT's essential components, which were tailored to optimize remote access, included a face-to-face orientation, telephone contact with a designated care coordinator, and daily monitoring sessions using an in-home telehealth device to assess participants' medication usage, compliance, and symptoms, and to provide patient education. One hundred eleven participants successfully installed and connected the telehealth monitoring device in their homes without hands-on assistance, monitored complex medical and psychiatric symptoms, and reported medication compliance remotely. Of the 93 participants who used the device for more than 10 sessions, 88 reported they did not have any difficulty using the device, 86 reported they were satisfied or very satisfied with the device, 73 reported they were likely to continue using the device, and 46 reported improved communication between themselves and their primary healthcare provider. Initial utilization and satisfaction evaluation data from this project supports the feasibility of employing a CCHT approach to serve medically-complicated older veterans in rural settings. This approach could also serve as a template for addressing a greater range of healthcare needs among other populations in hard-to-reach settings.

Does Risk-Neutral Skewness Predict the Cross-Section of Equity Option Portfolio Returns?

We investigate the pricing of risk-neutral skewness in the stock options market by creating skewness assets comprised of two option positions (one long and one short) and a position in the underlying stock. The assets are created such that exposure to changes in the underlying stock price (delta), and exposure to changes in implied volatility (vega) are removed, isolating the effect of skewness. We find a strong negative relation between risk-neutral skewness and the skewness asset returns, consistent with a positive skewness preference. The returns are not explained by well-known market, size, book-to-market, momentum, short-term reversal, volatility, or option market factors.

Remarks on the Nonlinear Black-Scholes Equations with the Effect of Transaction Costs

We deal with the solvability and a weak formulation of nonlinear partial differential equations of Black-Scholes type for the pricing of options in the presence of transaction costs. Examples include the Hoggard–Whalley–Wilmott equation, which is introduced to model portfolios of European type options with transaction costs based on the idea of Leland. The cost structure gives rise to nonlinear terms. We show the existence and the uniqueness of solutions both in the classical and the weak sense, where the notion of weak solutions is introduced.

Optimal Option Portfolio Strategies

Options should play an important role in asset allocation. They allow for kernel spanning and provide access to additional (priced) risk factors such as stochastic volatility and negative jumps. Unfortunately, traditional methods of asset allocation (e.g. mean-variance optimization) are not adequate for options because the distribution of returns is non-normal and the short sample of option returns available makes it difficult to estimate the distribution. We propose a method to optimize option portfolios that solves these limitations. An out-of-sample exercise is performed and we show that, even when transaction costs are incorporated, our portfolio strategy delivers an annualized Sharpe ratio of 0.59 between January 1996 and September 2008.

Exploring IMAGE model scenarios that keep greenhouse gas radiative forcing below 3 W/m 2 in 2100

A high probability of limiting temperature increase to 2 °C requires a radiative forcing below 3 W/m 2, around the end of this century, according to current knowledge. This paper identifies conditions under which achieving such low radiative forcing levels is feasible. Calculations here show that such targets could be achieved, based on technical and physical considerations, provided some key conditions are met. These key conditions include early participation by major sectors and regions in sufficiently stringent policy regimes, and a wide portfolio of mitigation options. Bio-energy and carbon capture and storage (CCS) play an important role in achieving low stabilisation targets. This would require optimistic assumptions with respect to the expansion of the area needed for food production, to allow space for bio-energy crops, and a significant increase in the efficiency of second-generation biofuels. The sensitivity analysis shows that if certain technologies are removed from the available portfolio, low targets — especially the 2.6 W/m 2 target — are no longer within reach.

The performance of value-at-risk models during the crisis

Using stock data that covers the period from 6th April 2001 to 17th June 2009, including data for the recent crisis period, we perform Value at Risk risk model validation by backtesting the performance of VaR models in predicting future losses of a portfolio of stocks, futures and options. The stock returns are modeled using univariate GARCH models for the stock returns with different assumptions on the distribution of the univariate model residuals such as normal distribution, t-distribution, empirical distribution with t-distributed tails. To capture co-dependence between financial return series we model dependence using the normal copula, the t-copula and the discrete normal mixture copula. Backtesting evaluations of different models indicate that inclusion of GARCH models for estimating and forecasting volatility make a significant contribution to the accuracy of VaR models. The contribution is both in terms of making VaR models match the expected number of VaR exceedances of losses and the VaR model exceedances having expected durations between them. However, while stochastic volatility is an important component of VaR model specifications it is not the only component. In particular, the choice of univariate model for the GARCH residuals and the choice of copula also affects the VaR model performance. Standard practice models used in Value at Risk estimation such as the deltanormal model, the covariance simulation model, with or without Risk Metrics covariance matrix, and the historical simulation model are shown to underestimate risk quite severely while models such as the discrete normal variance mixture copula with univariate GARCH performs well.

A modified static hedging method for continuous barrier options

AbstractThis study modifies the static replication approach of Derman, E., Ergener, D., and Kani, I. (1995, DEK) to hedge continuous barrier options under the Black, F. and Scholes, M. (1973) model. In the DEK method, the value of the static replication portfolio, consisting of standard options with varying maturities, matches the zero value of the barrier option at n evenly spaced time points when the stock price equals the barrier. In contrast, our modified DEK method constructs a portfolio of standard options and binary options with varying maturities to match not only the zero value but also zero theta on the barrier. Our numerical results indicate that the modified DEK approach improves performance of static hedges significantly for an up‐and‐out call option under the BS model even if the bid–ask spreads are considered. © 2010 Wiley Periodicals, Inc. Jrl Fut Mark

Exotic put options at the diffusion bond market

The direct approach is used to obtain formulas that determine the option price, portfolios (hedging strategies) and capitals for the European put options with guaranteed income for the option holder and limited payment for the investor at the diffusion (B,P)-bond market. The properties of the solution are studied. The results are specified for the bond pricing models known as the Ho-Lee and Vasicek models.

Distributed Water Infrastructure for Sustainable Communities

Distributed water infrastructure (located at the community or the household level) is relatively untried and unproven, compared with technologies for managing urban water at higher (e.g. regional) levels. This work presents a review of currently available options for distributed water infrastructure and illustrates the potential impact of their deployment through a number of indicative infrastructure strategies. The paper summarises the main categories of both centralised and decentralised water infrastructure, covering all three flows (water supply, wastewater and drainage) and their integration through recycling and reuse. The potential impact of the identified infrastructure options for urban water management is examined. The desirability of the strategies examined, is dependent on (case specific) constraints to urban development, including for example regional or local water resource availability, treatment plant capacity, cost of upgrading infrastructure, potential for (distributed) energy (micro) generation and climatic changes (and other non-stationary processes). The results are presented and discussed. It is concluded that there is currently a significant potential for a range of improvements in urban water management which could result from the context-aware deployment of a portfolio of technological infrastructure options. It is also suggested that there are trade-offs between water use, energy use and land use, and these have an equilibrium point that is associated with the technological state-of-art. At a given technological state-of-art, further reductions in water savings signify increase either energy consumption (for high-tech solutions) or land use (for low-tech solutions). The strategies’ evaluation indicates however, that until this equilibrium point is reached there can be significant gains in all three aspects. After this equilibrium, improvements in one aspect inevitably signify costs in others. The choice of desired trade-off then depends on the specific constraints of the problem at hand.

Assessing and valuing the nonlinear structure of hedge fund returns

Several studies have put forward the non-linear structure and option-like features of returns associated with hedge fund strategies. The authors provide a statistical methodology to test for such non-linear features with the returns on any benchmark portfolio. They estimate the portfolio of options that best approximates the returns of a given hedge fund, account for this search in the statistical testing of the contingent claim features, and test whether the identi…ed non-linear features have a positive value. The authors …nd that not all categories of funds exhibit signi…cant non-linearities, and that only a few strategies as a group provide signi…cant value to investors. Individual funds may still provide value in

Beneficial use of associated water in the Queensland coal seam gas industry

The Queensland Government has developed an associated water management policy that, among other things, strives to maximise the beneficial use of associated water derived from Queensland’s burgeoning coal seam gas industry. The Department of Infrastructure and Planning reports that domestic gas production alone (i.e. without an export LNG market) will produce on average 25 GL per annum in the next 25 years. Most of this water has sufficiently high total dissolved solids and other water quality issues to require some form of treatment prior to use. Clearly, the relatively large volumes of water present both challenges and opportunities to the communities in which the CSG industry is developing. In line with the philosophy of beneficial use of associated water, Santos has developed a portfolio of options within its associated water management strategy and plans for its Arcadia Valley, Fairview and Roma tenements. The strategy seeks to: provide enduring value for the community; maximise benefits while minimising the environmental footprint; provide a range of alternatives to avoid single-mode failure; use scalable options in response to uncertainty; deploy demonstrated technologies; and, meet and exceed all regulatory requirements. This paper will set some context around the broader CSG industry’s associated water challenges, and identify what parameters must be considered in arriving at beneficial uses for the water. The paper then explores some of Santos’ approaches to associated water management.