The impact of investment lags on investment decision

This paper suggests a valuation framework for an investment project through the concept of real options. Generally, in real asset world, decision time and its payment time are not identical. This so-called investment lag problem should be considered when valuing real assets. When investment lags exist, firms’ accommodation capacities play important roles. In this paper, the real effect of investment lag on investment value is tested upon various conditions. We show the valuation process of real assets under the risk-neutral world. The closed-form formula is also provided for valuing real assets, including R&D project.     

Constrained cost-coupled stochastic games with independent state processes

We study non-cooperative constrained stochastic games in which each player controls its own Markov chain based on its own state and actions. Interactions between players occur through their costs and constraints which depend on the state and actions of all players. We provide an example from wireless communications.     

On coordinate transformation and grid stretching for sparse grid pricing of basket options

We evaluate two coordinate transformation techniques in combination with grid stretching for pricing basket options in a sparse grid setting. The sparse grid technique is a basic technique for solving a high-dimensional partial differential equation. By creating a small hypercube sub-grid in the ‘composite’ sparse grid we can also determine hedge parameters accurately. We evaluate these techniques for multi-asset examples with up to five underlying assets in the basket.     

Callable risky perpetual debt with protection period

Issuances in the USD 260 Bn global market of perpetual risky debt are often motivated by capital requirements for financial institutions. We analyze callable risky perpetual debt emphasizing an initial protection (‘grace’) period before the debt may be called. The total market value of debt including the call option is expressed as a portfolio of perpetual debt and barrier options with a time dependent barrier. We also analyze how an issuer’s optimal bankruptcy decision is affected by the existence of the call option by using closed-form approximations. The model quantifies the increased coupon and the decreased initial bankruptcy level caused by the embedded option. Examples indicate that our closed form model produces reasonably precise coupon rates compared to numerical solutions. The credit-spread produced by our model is in a realistic order of magnitude compared to market data.     

Stability of two player game structures

We have extended a two player game-theoretical model proposed by V. Gurvich [To theory of multi-step games, USSR Comput. Math and Math. Phys. 13 (1973)] and H. Moulin [The Strategy of Social Choice, North Holland, Amsterdam, 1983]: All the considered game situations are framed by the same game structure. The structure determines the families of potential decisions of the two players, as well as the subsets of possible outcomes allowed by pairs of such choices. To be a solution of a game, a pair of decisions has to determine a (pure) functional equilibrium of the situational pair of payoff mappings which transforms the realized outcome into real-valued rewards of the players. Accordingly we understand that a structure is stable, if it admits functional equilibria for all possible game situations; and that it is complete, if every situation that only partitions the potential outcomes, is dominated by one of the players. We have generalized and strengthened a theorem by V. Gurvich [Equilibrium in pure strategies, Soviet Math. Dokl. 38 (1989)], proving that a proper structure is stable iff it is complete. Additional results provide game-theoretical insight that focuses the inquiry on the complexity of the stability decision problem; in particular, for coherent structures.These results also have combinatorial importance because every structure is characterized by a pair of hypergraphs [C. Berge, Graphes et Hypergraphes, Dunod, 1970] over a common ground set. The structure is dual (complete/coherent) iff the clutter of one hypergraph equals (includes/is included in) the blocker of the other one. So, for non-void coherent structures, the stability decision problem is equivalent to the much studied subexponential [M.L. Fredman, L. Khachiyan, On the complexity of dualization of monotone disjunctive normal forms, J. Algorithms 21 (1996)] hypergraph duality decision problem.     

具有跳扩散的美式期权二叉树计算格式的收敛速率

American put option with jump-diffusion can be modelled as a vari- ational inequality problem with an integral term.Under the stability condition (σ~2Δt)/(Δx~2)≤1,whereΔx=ln(S_n 1)/(S_n),the convergence rate O((Δx)~(2/3) (Δt)~(1/3))of the explicit finite scheme for this problem is obtained by using penalization technique. The binomial tree scheme of this model,which is equivalent to the explicit scheme, is convergent by the same rate.     

Numerical calculation of an asymmetric supply function equilibrium with capacity constraints

Producers submit offer curves to a procurement auction, e.g. an electricity auction, before uncertain demand has been realised. In the supply function equilibrium (SFE), every firm commits to the offer curve that maximises its expected profit, given the offer curves of competitors. The equilibrium is given by a system of differential equations. In practice, it has been very difficult to find valid SFE, i.e. non-decreasing solutions, from this system, especially for asymmetric producers. This paper shows that valid SFE can be calculated by means of a shooting algorithm that combines numerical integration with an optimisation procedure that searches for an end-condition. Multiple/parallel shooting is used for ill-conditioned cases.     

Pricing American Asian options with higher moments in the underlying distribution

We develop a modified Edgeworth binomial model with higher moment consideration for pricing American Asian options. With lognormal underlying distribution for benchmark comparison, our algorithm is as precise as that of Chalasani et al. [P. Chalasani, S. Jha, F. Egriboyun, A. Varikooty, A refined binomial lattice for pricing American Asian options, Rev. Derivatives Res. 3 (1) (1999) 85–105] if the number of the time steps increases. If the underlying distribution displays negative skewness and leptokurtosis as often observed for stock index returns, our estimates can work better than those in Chalasani et al. [P. Chalasani, S. Jha, F. Egriboyun, A. Varikooty, A refined binomial lattice for pricing American Asian options, Rev. Derivatives Res. 3 (1) (1999) 85–105] and are very similar to the benchmarks in Hull and White [J. Hull, A. White, Efficient procedures for valuing European and American path-dependent options, J. Derivatives 1 (Fall) (1993) 21–31]. The numerical analysis shows that our modified Edgeworth binomial model can value American Asian options with greater accuracy and speed given higher moments in their underlying distribution.     

跳扩散模型下的欧式障碍期权的定价

本文在标的资产价格服从跳扩散模型的假设下,运用Girsanov定理获得了价格过程的等价鞅测度,用期权定价的鞅方法得出障碍期权的定价公式.     

均衡信贷配给的期权定价分析

本文基于期权定价的视角分析信贷配给，以一条全新的思路阐释均衡信贷配给的成因及特征，并试图得出些许启示。