To have a real option means to have the possibility for a certain period to either choose for or against making an invetsment decision, without binding oneself up front. The real option rule is that one should invest today only if the net present value is high enough to compensate for giving up the value of the option to wait. Because the option to invest loses its value when the investment is ...

We prove that the perpetual American put option price of an exponential Lévy process whose jumps come from a compound Poisson process is the classical solution of its associated quasi-variational inequality, that it is C except at the stopping boundary and that it is C everywhere (i.e. the smooth pasting condition always holds). We prove this fact by constructing a sequence of functions, each o...

This paper analyzes the relations among firm-level stock option portfolio incentives, investment, and firm value based on a sample of Finnish firms during the time period 1987 – 2000. Utilizing exact and complete information regarding stock option portfolio characteristics, we find some evidence that firm investment is increasing in the incentives to increase stock price (delta) and risk (vega)...

We prove that the perpetual American put option price of an exponential Lévy process whose jumps come from a compound Poisson process is the classical solution of its associated quasi-variational inequality, that it is C except at the stopping boundary and that it is C everywhere (i.e. the smooth pasting condition always holds). We prove this fact by constructing a sequence of functions, each o...

This paper examines option to defer an investment in thermal rehabilitation of building. Heat savings generated by energy efficiency investment in two distinctive areas connected to district heating in Prague are studied. Despite substantial difference of heat price over several years no significant difference in heat savings between the two areas is found. It is shown that different volatility...

We describe a search problem in which a decision maker (DM) must select several sequentially-encountered options. Each option is described by multiple attributes, and the value of an option is given by a function of its attribute values. However, the attribute values are not known with certainty, and can only be ascertained in a predefined order, at some fixed cost. During the search the DM can...

This paper investigates Black–Scholes call and put option thetas, and derives upper and lower bounds for thetas as a function of underlying asset value. It is well known that the maximum time premium of an option occurs when the underlying asset value equals the exercise price. However, we show that the maximum option theta does not occur at that point, but instead occurs when the asset value i...

Monte Carlo simulation is one alternative for analyzing options markets when the assumptions of simpler analytical models are violated. We introduce techniques for the sensitivity analysis of option pricing which can be efficiently carried out in the simulation. In particular, using these techniques, a single run of the simulation would often provide not only an estimate of the option value but...

In this paper, in order to model breach of contract risk, we design and value a bundled option that is composed of contract abandonment and price renegotiation. We show numerically that the bundled option is more valuable for the contract than either of the options, ie, contract abandonment and price renegotiation, in isolation. This value increases monotonically as the spot price becomes more ...

We prove that the perpetual American put option price of an exponential Lévy process whose jumps come from a compound Poisson process is the classical solution of its associated quasi-variational inequality, that it is C except at the stopping boundary and that it is C everywhere (i.e. the smooth pasting condition always holds). We prove this fact by constructing a sequence of functions, each o...