Jerome Detemple
- McGillNontraded Asset Valuation with Portfolio Constraints: A Binomial Approach
ABSTRACT: This paper provides a constructive framework to value American-style derivative assets that are subject to trading restrictions. We employ a simple binomial approach to characterize the private value and the optimal exercise policies associated with nontraded derivatives. The problem of optimal investment of liquid wealth is solved simultaneously with the exercise decision of the nontraded derivative. This leads to a path-dependent problem for which we provide a tractable solution procedure. Trading restrictions on the underlying asset manifest themselves in the form of an implicit dividend yield in the risk neutralized process for the underlying asset. One consequence of this result is that American call options may be optimally exercised prior to maturity even when the underlying asset pays no dividends. Applications to Executive Compensation Options are presented. An extension of our model deals with nontraded payoffs based on a price that is imperfectly correlated with the asset that can be traded. We show that early exercise of an American call option on a nondividend-paying asset may still be optimal in this case.
David Heath
- Carnegie Mellon UniversityFutures-based Models for the Evolution of the Term Structure of Interest Rates
ABSTRACT: There are currently two principal paradigms for modeling interest rate evolution: spot rate models and full term structure (HJM) models. Each has advantages and disadvantages. For spot rate models, it is difficult to use data to choose the form of the spot rate model to use for pricing since the data are observed under the physical measure, while for pricing one models behavior under the martingale measure. Full term structure models, at least in interesting cases, require intense computational effort. This talk presents a new class of models, based on futures prices, for which estimation and calculations are reasonable simple.
Nalin Kulatilaka
- Boston UniversityRobert Pindyck – MIT
Real Options: Taking Contingent Claims Analysis from Wall Street to MainStreet
ABSTRACT: One of the fundamental issues of corporate finance continues to be the valuation of project cash flows that can be influenced by management’s actions in response to evolving market conditions. The application of techniques and insights of contingent claims analysis to address the valuation of such options on real assets have come to be known as real options. In this talk I will provide a brief survey of the literature on real options by using a series of examples to illustrate the scope of applicability of real options, and contrast the features of financial options with those of real options in order to surface (demonstrate?) the technical issues that must be overcome in valuing real options. I will conclude by showing how these new insights can help companies address strategic concerns by developing entirely new product lines and business models and examine the effects of strategic preemption on investment timing options.
Mark Rubinstein
- BerkeleyDerivatives Performance Attribution
ABSTRACT: The challenge of performance attribution is to find a way to decompose the realized return of a portfolio, which may contain derivatives, attributing its components to particular causes. My talk will demonstrate how to decompose the dollar profit earned from an option into two separable components. This separation hinges on measuring the "true relative value" of the option from its realized payoff.
Joseph F. Traub
- Computer Science Department, Columbia UniversityWhy does Quasi-Monte Carlo beat Monte Carlo for Mathematical Finance?
ABSTRACT: A brief review of the relevant theory of information-based complexity and low discrepancy sequences will be provided. The results of numerical experimentation using our FINDER software system will be reported. Finally, new insights into why low discrepancy methods beat Monte Carlo will be discussed.
Marc Yor
- Université Pierre et Marie CurieInsider Trading and Initial Enlargement of Filtrations
ABSTRACT: The lecture reviews the fundamentals of the method of enlargement of filtrations and some recent applications of this method to insider trading made by a number of authors, including Karatzas, Pikovsky, Amendiger-Imkeller-Schweizer, and Folmer-Wu.