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The Early Exercise Premium In American Option Prices
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Book Synopsis The Early Exercise Premium in American Option Prices by : Lindsey McMurray
Download or read book The Early Exercise Premium in American Option Prices written by Lindsey McMurray and published by . This book was released on 1998 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: The London stock options market trades both European and American style options on the same underlying asset--the FT- SE 100 stock index. This paper exploits this special feature to provide direct empirical evidence on the value of early exercise in American option prices. Significant early exercise premium is found in both calls and puts. The premium is significantly higher than that predicted analytically by the binomial option valuation model. The magnitude of this premium for in-the-money options is also considerably higher than that documented for the U.S. market on the basis of an imperfect proxy. Consistent with theoretical expectations, the premium of calls increases with the degree to which the option is in the money and with the dividends on the last ex-dividend date before option maturity; and the premium for puts is positively related to the degree to which the option is in the money and to the time to maturity, and negatively related to the dividends on the last ex-dividend date prior to expiration. The early exercise premium for calls is sometimes economically significant even when there is no possibility of dividends before maturity. At the same time, the American option often trades at a discount to its European counterpart greater in magnitude than the median bid-ask spread, though this does not necessarily signal economically significant pricing inefficiency.
Book Synopsis The Early Exercise Premium in American Put Option Prices by : Malin Engstrom
Download or read book The Early Exercise Premium in American Put Option Prices written by Malin Engstrom and published by . This book was released on 2003 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: This study estimates the value of the early exercise premium in American put option prices using Swedish equity options data. The value of the premium is found as the deviation of the American put price from European put-call parity, and in addition a theoretical estimate of the premium is computed. The empirically found premium is also used in a modified version of the control variate approach to value American puts. The results indicate a substantial value of the early exercise premium, where the premium derived from put-call parity is higher than the theoretical premium. The premium also increases with moneyness and time left to expiration, while the effect of interest rate and volatility depends on the moneyness of the option. The modified control variate technique works reasonably well relative the theoretical models. In particular, for deep in-the-money options, this technique is superior.
Book Synopsis American Put Options by : Donna Salopek
Download or read book American Put Options written by Donna Salopek and published by CRC Press. This book was released on 1997-03-15 with total page 132 pages. Available in PDF, EPUB and Kindle. Book excerpt: An American put option gives its owner the right to sell a share of stock at a given specified price on or before a given date. This book provides a detailed comparison of recent works on the American put option from both theoretical and computational approaches.
Book Synopsis The Numerical Solution of the American Option Pricing Problem by : Carl Chiarella
Download or read book The Numerical Solution of the American Option Pricing Problem written by Carl Chiarella and published by World Scientific. This book was released on 2014-10-14 with total page 223 pages. Available in PDF, EPUB and Kindle. Book excerpt: The early exercise opportunity of an American option makes it challenging to price and an array of approaches have been proposed in the vast literature on this topic. In The Numerical Solution of the American Option Pricing Problem, Carl Chiarella, Boda Kang and Gunter Meyer focus on two numerical approaches that have proved useful for finding all prices, hedge ratios and early exercise boundaries of an American option. One is a finite difference approach which is based on the numerical solution of the partial differential equations with the free boundary problem arising in American option pricing, including the method of lines, the component wise splitting and the finite difference with PSOR. The other approach is the integral transform approach which includes Fourier or Fourier Cosine transforms. Written in a concise and systematic manner, Chiarella, Kang and Meyer explain and demonstrate the advantages and limitations of each of them based on their and their co-workers'' experiences with these approaches over the years. Contents: Introduction; The Merton and Heston Model for a Call; American Call Options under Jump-Diffusion Processes; American Option Prices under Stochastic Volatility and Jump-Diffusion Dynamics OCo The Transform Approach; Representation and Numerical Approximation of American Option Prices under Heston; Fourier Cosine Expansion Approach; A Numerical Approach to Pricing American Call Options under SVJD; Conclusion; Bibliography; Index; About the Authors. Readership: Post-graduates/ Researchers in finance and applied mathematics with interest in numerical methods for American option pricing; mathematicians/physicists doing applied research in option pricing. Key Features: Complete discussion of different numerical methods for American options; Able to handle stochastic volatility and/or jump diffusion dynamics; Able to produce hedge ratios efficiently and accurately"
Book Synopsis Hints for an Extension of the Early Exercise Premium Formula for American Options by : Hans-Peter Bermin
Download or read book Hints for an Extension of the Early Exercise Premium Formula for American Options written by Hans-Peter Bermin and published by . This book was released on 2007 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: The characterization of the American put option price is still an open issue. From the beginning of the nineties there exists a non-closed formula for this price but nontrivial numerical computations are required to solve it. Strong efforts have been made to propose computational efficient methods but few of them have strong mathematical reasoning to ascertain why these methods work well and how important it is to consider a good approximation to the boundary or to the smooth pasting condition. We present an extension of the American put price aiming to catch weaknesses of the numerical methods given in the literature.
Book Synopsis European Put-Call Parity and the Early Exercise Premium for American Currency Options by : Geoffrey Poitras
Download or read book European Put-Call Parity and the Early Exercise Premium for American Currency Options written by Geoffrey Poitras and published by . This book was released on 2016 with total page 16 pages. Available in PDF, EPUB and Kindle. Book excerpt: The European put-call parity condition is used to estimate the early exercise premium for American currency options traded on the Philadelphia Stock Exchange. Using a sample of 331 pairs of call and put options with the same exercise price and time to expiration, evidence is provided for early exercise premiums that average 5.03% for put options and 4.60% for call options. The premiums for both call and put options are strongly related to the interest rate differential and time to expiration. These results have implications for the use of European option pricing models in the valuation of American options.
Book Synopsis American Index Put Options Early Exercise Premium Estimation by : Ako Doffou
Download or read book American Index Put Options Early Exercise Premium Estimation written by Ako Doffou and published by . This book was released on 2008 with total page 26 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper examines empirically the value of early exercise by testing the ability of two American put valuation models to predict the early exercise premium for the Samp;P 100 American put options. An accuracy test and a quality test are performed on (1) the MacMillan (1986) amp; Barone-Adesi and Whaley (1987) model, and (2) the Carr, Jarrow and Myneni(1992) model. The test results show that early exercise premium is significant regardless of moneyness. Moreover, consistent with the theory, the value of early exercise is significantly negatively related to moneyness and interest rates and significantly positively related to time to maturity and to the volatility of the underlying index. Both American put valuation models examined do not fully capture the value of early exercise embedded in American put prices.
Book Synopsis Estimating the Early Exercise Premium of American Put Index Options by : Ako Doffou
Download or read book Estimating the Early Exercise Premium of American Put Index Options written by Ako Doffou and published by . This book was released on 2019 with total page 9 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper examines empirically the value of early exercise by testing the ability of two American put valuation models to predict the early exercise premium for the S&P 100 American put options. An accuracy test and a quality test are performed on (1) the MacMillan, Barone-Adesi and Whaley model, and (2) the Carr, Jarrow and Myneni model. The test results show that early exercise premium is significant regardless of moneyness. Moreover, consistent with the theory, the value of early exercise is significantly negatively related to moneyness and interest rates and significantly positively related to time to maturity and to the volatility of the underlying index. Both American put valuation models examined do not fully capture the value of early exercise embedded in American put prices.
Book Synopsis Probabilities and Values of Early Exercise by : James N. Bodurtha
Download or read book Probabilities and Values of Early Exercise written by James N. Bodurtha and published by . This book was released on 2012 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: This article analyzes fundamental differences between American spot and futures options. These options differ in their early exercise probabilities and values, and in option buyers' exercise behavior. We find two key results: one theoretical and one empirical. First, unlike spot options, some futures options' early exercise probabilities and values do not correspond. Specifically, increased volatility raises the early exercise premium for in-the-money futures calls, but lowers the associated early exercise probability. Similarly, increasing the domestic interest rate raises the futures put early exercise premium, while lowering the associated early exercise probability. Second, observed early exercise experience of Philadelphia Stock Exchange spot options and Chicago Mercantile Exchange futures options is consistent with optimal early exercise behavior prescribed by a standard American option pricing model. Both types of option exercise events occur at or near the modeled early exercise boundaries.
Book Synopsis Finance at Fields by : Matheus R. Grasselli
Download or read book Finance at Fields written by Matheus R. Grasselli and published by World Scientific. This book was released on 2013 with total page 598 pages. Available in PDF, EPUB and Kindle. Book excerpt: This outstanding collection of articles includes papers presented at the Fields Institute, Toronto, as part of the Thematic Program in Quantitative Finance that took place in the first six months of the year 2010. The scope of the volume in very broad, including papers on foundational issues in mathematical finance, papers on computational finance, and papers on derivatives and risk management. Many of the articles contain path-breaking insights that are relevant to the developing new order of post-crisis financial risk management.
Book Synopsis Numerical Solution Of The American Option Pricing Problem, The: Finite Difference And Transform Approaches by : Carl Chiarella
Download or read book Numerical Solution Of The American Option Pricing Problem, The: Finite Difference And Transform Approaches written by Carl Chiarella and published by World Scientific. This book was released on 2014-10-14 with total page 223 pages. Available in PDF, EPUB and Kindle. Book excerpt: The early exercise opportunity of an American option makes it challenging to price and an array of approaches have been proposed in the vast literature on this topic. In The Numerical Solution of the American Option Pricing Problem, Carl Chiarella, Boda Kang and Gunter Meyer focus on two numerical approaches that have proved useful for finding all prices, hedge ratios and early exercise boundaries of an American option. One is a finite difference approach which is based on the numerical solution of the partial differential equations with the free boundary problem arising in American option pricing, including the method of lines, the component wise splitting and the finite difference with PSOR. The other approach is the integral transform approach which includes Fourier or Fourier Cosine transforms. Written in a concise and systematic manner, Chiarella, Kang and Meyer explain and demonstrate the advantages and limitations of each of them based on their and their co-workers' experiences with these approaches over the years.
Book Synopsis Option Pricing by : Menachem Brenner
Download or read book Option Pricing written by Menachem Brenner and published by Free Press. This book was released on 1983 with total page 264 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Download or read book Options Markets written by John C. Cox and published by Prentice Hall. This book was released on 1985 with total page 518 pages. Available in PDF, EPUB and Kindle. Book excerpt: Includes the first published detailed description of option exchange operations, the first published treatment using only elementary mathematics and the first step-by-step procedure for implementing the Black-Scholes formula in actual trading.
Book Synopsis Put-Call Parity and the Early Exercise Premium for Currency Options by : Chris Veld
Download or read book Put-Call Parity and the Early Exercise Premium for Currency Options written by Chris Veld and published by . This book was released on 2005 with total page 8 pages. Available in PDF, EPUB and Kindle. Book excerpt: Put-call parity is used to study the early exercise premium for currency options traded on the Philadelphia Stock Exchange. Using 564 pairs of call and put options evidence is provided that the early exercise premia is on average 5.71% for put options and 6.88% for call options. The premiums for both call and put options are strongly related to time to maturity and the interest rate differential. These results are important when using a European option pricing model for the valuation of American options.
Book Synopsis Valuation of Early Exercise Premium on Currency Options by : John Lee
Download or read book Valuation of Early Exercise Premium on Currency Options written by John Lee and published by . This book was released on 2006 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt: Previous studies on American options have shown that European style models do not reflect early exercise premium (EEP). This project expands on the Poitras, Veld and Zabolotnyuk (2006) paper which applies the put-call parity method to currency options data from American options traded at PHLX for EEP. We define a wider range for in-the moneyness and use a rolling volatility for the volatility parameter. We estimate the early exercise premium as a percentage of option price (REEP) for calls and puts to be 7.329%, 6.122%, respectively. We then regress the REEP against moneyness, interest differentials, and time to maturity and volatility. Our results show that REEP is strongly and positively correlated with interest rate differentials and time to maturity. The effect of moneyness is less apparent. The effect of volatility on REEPs of put options is significantly negative, which coincides with the results of Poitras, Veld and Zabolotnyuk (2006).
Book Synopsis Handbook of Short Selling by : Greg N. Gregoriou
Download or read book Handbook of Short Selling written by Greg N. Gregoriou and published by Academic Press. This book was released on 2011-09-28 with total page 626 pages. Available in PDF, EPUB and Kindle. Book excerpt: This comprehensive examination of short selling, which is a bet on stocks declining in value, explores the ways that this strategy drives financial markets. Its focus on short selling by region, its consideration of the history and regulations of short selling, and its mixture of industry and academic perspectives clarify the uses of short selling and dispel notions of its destructive implications. With contributions from around the world, this volume sheds new light on the ways short selling uncovers market forces and can yield profitable trades. Combines academic and professional research on short selling in all major financial markets Emphasizes details about strategies, implementations, regulation, and tax advantages Chapters provide summaries for readers who want up-to-date maps of subject landscapes
Book Synopsis CFA Level 2 Study Guide 2024 by : MUHAMMAD ZAIN
Download or read book CFA Level 2 Study Guide 2024 written by MUHAMMAD ZAIN and published by Zain Academy. This book was released on 2024-02-06 with total page 834 pages. Available in PDF, EPUB and Kindle. Book excerpt: Engage with Excellence: Your Gateway to Conquering the CFA Level 2 Exam with Zain Academy's Comprehensive Study Guide Welcome to Zain Academy's CFA Level 2 Study Guide 2024, your ultimate resource crafted meticulously by Muhammad Zain, a seasoned financial expert. This guide is not just a study material; it's your strategic partner in navigating the challenging waters of the CFA Level 2 Exam. 🌟 Key Features of Our Study Guide: - 1,574 Questioning Mind Study Points: Dive into an extensive collection of study points designed to provoke thought and deepen your understanding. - 1,352 True/False Questions with Detailed Explanations: Test your knowledge and reinforce learning with a vast array of questions accompanied by thorough explanations. - User-Friendly Format: Available in an integrated printable PDF format, optimized for all screen sizes – study anytime, anywhere. - Unlimited Access, No Restrictions: Once you acquire this guide, it’s yours forever. Study at your own pace, on any device, without any time constraints. 📚 Free Sample and Learning Videos: - Try Before You Buy: Get a taste of our quality content with a free sample of the book. - Complimentary Learning Videos on YouTube: Enhance your study experience with our series of free educational videos. 👨🏫 Personal Support from Muhammad Zain: - Unlimited Personal Guidance: As an author committed to your success, Muhammad Zain offers personalized support and guidance until you pass the exams. Have a question? Reach out via WhatsApp or Email for an expert's advice. - Join Our CFA WhatsApp Group: Become part of a community of like-minded candidates. Gain access to exclusive articles, blog posts, exam strategies, and tricks. 💡 Why Choose Zain Academy's Guide? - Expertly Crafted Content: Created by a professional with deep industry knowledge. - Focused on Your Success: Our guide and support are designed with one goal – to help you pass the CFA Level 2 Exam on your first attempt. 🌐 Embark on Your Journey to Success: Subscribe your guide today and take the first step towards achieving your CFA dreams with Zain Academy. Remember, with us, you're not just preparing for an exam; you're building a foundation for a successful career in finance.
