Options With Constant Underlying Elasticity in Strikes

Posted: 28 Dec 2014

See all articles by Lloyd P. Blenman

Lloyd P. Blenman

University of North Carolina (UNC) at Charlotte - Department of Finance & Business Law

Steven P. Clark

University of North Carolina (UNC) at Charlotte

Date Written: 2005

Abstract

Closed-form solutions are derived and interpreted for European options, with stochastic strike prices, that maintain constant elasticity of the strike with respect to the price of the underlying asset. We refer to such options as CUES. CUES preserve the relative shares of exercise price risk for both the buyer and writer of the option, regardless of whether the price of the underlying asset moves up or down. The relevance of the CUES concept is established through applications in two distinct fields. First, it is established that CUES-like options are embedded in private equity investments. This concept is then used in a novel application to determine the equity share of a private company corresponding to a given level of investment. Secondly, the advantages that CUES would provide over traditional executive stock option grants are considered and it is shown that CUES can provide enhanced incentive-alignment without increasing options expense to the company.

Keywords: exotic options, exercise price uncertainty, nonlinear payoff options

JEL Classification: G130

Suggested Citation

Blenman, Lloyd P. and Clark, Steven P., Options With Constant Underlying Elasticity in Strikes (2005). Review of Derivatives Research, Vol. 8, No. 2, 2005, Available at SSRN: https://ssrn.com/abstract=1031701

Lloyd P. Blenman

University of North Carolina (UNC) at Charlotte - Department of Finance & Business Law ( email )

9201 University City Blvd.
Charlotte, NC 28223
United States
704-687-7705 (Phone)

Steven P. Clark (Contact Author)

University of North Carolina (UNC) at Charlotte ( email )

9201 University City Boulevard
Charlotte, NC 28223
United States

Do you have negative results from your research you’d like to share?

Paper statistics

Abstract Views
410
PlumX Metrics