Reset Options on South African Equities
11 Pages Posted: 29 Mar 2013 Last revised: 16 Apr 2013
Date Written: April 1, 2003
“Timing the markets” has been a topic of investigation for many decades. Every investor dreams of the perfect system that will tell him to buy right at the bottom or sell right at the top. The same holds for investors who want to hedge or gear their portfolio by using options. If an investor buys a call and the market turns down he always thinks that he should have waited to get the call at a lower strike. The same holds if the investor bought a put as a hedge. If the market rallies and then retraces he could have hedged at a better level if he waited. The reset option was created as a cost effective structure that assists investors in minimising the timing problem. The purpose of this paper is to develop, define and value a reset option with the above mentioned properties. We will, however, only discuss reset options with one reset date.
Keywords: Reset option, Black-Scholes, option pricing, timing the market, structured derivative, exotic options, volatility, Black and Scholes, market timing, floating strike option, lookback, floating strike lookback
JEL Classification: G12, G13, C61
Suggested Citation: Suggested Citation