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The values and incentive effects of options on the maximum or the minimum of the stock prices and market index

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  • Wang, Xingchun

Abstract

In this study, we employ the certainty equivalent principle to investigate cost efficiency and incentives of the options on the maximum or the minimum of the stock prices and market index levels. In addition, the options with averaging features are also considered. Numerical results show that options on the maximum are more cost efficient and incentive-efficient than traditional ones. As for options on the minimum, they are more cost efficient than traditional ones only when the weight in the options is not very large. However, options on the minimum also provide stronger incentives to increase stock prices than traditional ones.

Suggested Citation

  • Wang, Xingchun, 2021. "The values and incentive effects of options on the maximum or the minimum of the stock prices and market index," The North American Journal of Economics and Finance, Elsevier, vol. 55(C).
    • Handle: RePEc:eee:ecofin:v:55:y:2021:i:c:s1062940820302345
    DOI: 10.1016/j.najef.2020.101352
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    Cited by:

    1. Wang, Xingchun, 2021. "Valuation of options on the maximum of two prices with default risk under GARCH models," The North American Journal of Economics and Finance, Elsevier, vol. 57(C).
    2. Battauz, Anna & De Donno, Marzia & Sbuelz, Alessandro, 2022. "On the exercise of American quanto options," The North American Journal of Economics and Finance, Elsevier, vol. 62(C).

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    More about this item

    Keywords

    Incentive effects; Executive stock options; Options on the maximum; Options on the minimum;
    All these keywords.

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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