Post by Sapphire Capital on Aug 9, 2008 1:30:55 GMT 4
Extending Options by Changing Their Underlying Assets
Jian Wu
University of Rouen Graduate School of Management Economics & International Finance
June, 05 2008
Abstract:
This article aims to examine a new type of exotic option, namely the generalized extendible option. Compared to traditional options, such an option has two characteristics: firstly, its maturity has the possibility to be extended for a given period; secondly, once the option is extended, its original underlying asset will be replaced by a new underlying asset. Within this framework, two option categories with different extension conditions are studied. For the first category, a plain-vanilla option will be extended automatically by the optionwriter without any additional premium payment from the optionholder if its payoff at the original maturity date is zero. For the second category, a plain-vanilla option can be extended by the optionholder by accepting to pay a predetermined additional premium at the original maturity date. For these European-style call and put options, closed-form formulas are derived to determine or to estimate their values. In addition, we have shown that generalized extendible options have numerous applications in different fields, such as corporate financing, corporate risk management, corporate capital structure analysis, funds structuring, and option modeling.
papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID1141203_code1037039.pdf?abstractid=1141203&mirid=1
Jian Wu
University of Rouen Graduate School of Management Economics & International Finance
June, 05 2008
Abstract:
This article aims to examine a new type of exotic option, namely the generalized extendible option. Compared to traditional options, such an option has two characteristics: firstly, its maturity has the possibility to be extended for a given period; secondly, once the option is extended, its original underlying asset will be replaced by a new underlying asset. Within this framework, two option categories with different extension conditions are studied. For the first category, a plain-vanilla option will be extended automatically by the optionwriter without any additional premium payment from the optionholder if its payoff at the original maturity date is zero. For the second category, a plain-vanilla option can be extended by the optionholder by accepting to pay a predetermined additional premium at the original maturity date. For these European-style call and put options, closed-form formulas are derived to determine or to estimate their values. In addition, we have shown that generalized extendible options have numerous applications in different fields, such as corporate financing, corporate risk management, corporate capital structure analysis, funds structuring, and option modeling.
papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID1141203_code1037039.pdf?abstractid=1141203&mirid=1