Pricing, value-at-risk and dynamic properties of re-settable strike-price puts
Tóm tắt
This paper considers a particular type of re-settable strike-price put contract. This class of contract is important because it has come into widespread use as an embedded feature of investment vehicles such as segregated-funds investments and protected index notes. Holders of short positions in these contracts face a potential liability that crystallises if contracts mature at a time when market prices are below strike prices. This leads naturally to questions concerning the hedging behaviour of these products, and the value-at-risk associated with positions in them. We address these questions in this paper.
Tài liệu tham khảo
Falloon2, Canada's Option Nightmare, Risk (1999) discusses issues surrounding these contracts.
Falloon, W. (1999) ‘Canada's Option Nightmare’, Risk. 12, August, p. 60.
A ‘plain vanilla’ put option is a contract that gives the holder the right but not the obligation to sell to the issuer a pre-determined number of units of the underlying at a pre-determined price and date.
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We do not claim originality for this pricing expression. It is a special case of those in Longstaff.4
The reset feature is European in the sense that it cannot be exercised before the pre-specified reset date.
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The term ‘value-at-risk’ is usually associated with increased exposure upon the happening of an event. In Table 6, the event is an extreme downward move in the underlying from a reference level in the first column. For certain combinations of time to maturity and level of the underlying reported in Table 6 the downward move in the underlying results in a decline in option price or, in other words, reduced exposure rather than increased exposure. We leave these cells blank to indicate that there is no value at risk.
The term ‘value-at-risk’ is usually associated with increased exposure upon the happening of an event. In Table 7, the event is an extreme upward move in the underlying from a reference level in the first column. For certain combinations of time to maturity and level of the underlying reported in Table 7 the upward move in the underlying results in a decline in option price or, in other words, reduced exposure rather than increased exposure. We leave these cells blank to indicate that there is no value at risk.
The term ‘value-at-risk’ is usually associated with increased exposure upon the happening of an event. In Table 8, the event is an extreme downward move in the underlying from a reference level in the first column. For certain combinations of time to maturity and level of the underlying reported in Table 8 the downward move in the underlying results in a decline in option price or, in other words, reduced exposure rather than increased exposure. We leave these cells blank to indicate that there is no value at risk.
The term ‘value-at-risk’ is usually associated with increased exposure upon the happening of an event. In this case the event is an extreme upward move in the underlying from the reference level in the first column of Table 9. For some time to maturity and level of the underlying combinations reported in Table 9 the extreme upward move in the underlying results in a decline in option price or, in other words, reduced exposure rather than increased exposure. We left these cells blank in Table 9 to indicate this.
Hull, J.C. (2000) ‘Options, Futures & Other Derivative Securities4th edn. Prentice-Hall, Inc., Upper Saddle River, NJ.
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