Valuation and Optimal Exercise of Derivatives under Private Information

38 Pages Posted: 4 May 2018 Last revised: 17 Jun 2024

See all articles by Jørgen Haug

Jørgen Haug

Norwegian School of Economics (NHH) - Department of Finance

Tommy Stamland

Norwegian School of Economics (NHH) - Department of Finance

Date Written: June 24, 2020

Abstract

We provide an easy-to-use model that values derivatives for a privately informed agent. We introduce private forward prices that conveniently format private information for inclusion in a standard no-arbitrage framework. This framework yields simple expressions for the privately-informed value of European options. We show that flexible timing of American option exercise can be used to mitigate adverse information or exploit favorable information. Private information may thus cause significant differences between European and American call values, even in the absence of dividends.

Keywords: options, optimal exercise, asymmetric information

JEL Classification: D82, G12, G13

Suggested Citation

Haug, Jørgen and Stamland, Tommy, Valuation and Optimal Exercise of Derivatives under Private Information (June 24, 2020). Available at SSRN: https://ssrn.com/abstract=3162027 or http://dx.doi.org/10.2139/ssrn.3162027

Jørgen Haug

Norwegian School of Economics (NHH) - Department of Finance ( email )

Helleveien 30
N-5045 Bergen
Norway

Tommy Stamland (Contact Author)

Norwegian School of Economics (NHH) - Department of Finance ( email )

Helleveien 30
N-5045 Bergen
Norway
+47 55 95 93 08 (Phone)
+47 55 95 96 50 or 47 (Fax)

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