Pricing Installment Options with an Application to Asx Installment Warrants

26 Pages Posted: 7 Jan 2003

See all articles by Hatem Ben Ameur

Hatem Ben Ameur

HEC Montreal - Department of Management Sciences

Michèle Breton

HEC Montreal - Department of Management Sciences

Pascal Francois

HEC Montreal - Department of Finance

Date Written: October 30, 2002

Abstract

Installment options are Bermudan-style options where the holder periodically decides whether to exercise or not and then to keep the option alive or not (by paying the installment). We develop a dynamic programming procedure to price installment options. We derive the range of installments within which the installment option is not redundant with the European contract. Simulations analysis shows the method yields monotonically converging prices, and satisfactory trade-offs between accuracy and computational time. In addition, we examine the flexibility in installment option design that yields various hedging properties. Our approach is applied to installment warrants, which are actively traded on the Australian Stock Exchange. Numerical investigation shows the various capital dilution effects resulting from different installment warrant designs.

Keywords: Option Pricing, Exotic Options, Dynamic Programming, Installment Options

JEL Classification: C63, G13

Suggested Citation

Ben Ameur, Hatem and Breton, Michèle and Francois, Pascal, Pricing Installment Options with an Application to Asx Installment Warrants (October 30, 2002). Available at SSRN: https://ssrn.com/abstract=346922 or http://dx.doi.org/10.2139/ssrn.346922

Hatem Ben Ameur

HEC Montreal - Department of Management Sciences ( email )

Montreal, Quebec H3T 2A7
Canada
514-340-6480 (Phone)
514-340-5634 (Fax)

Michèle Breton

HEC Montreal - Department of Management Sciences ( email )

Montreal, Quebec H3T 2A7
Canada
514-340-6490 (Phone)
514-340-5634 (Fax)

Pascal Francois (Contact Author)

HEC Montreal - Department of Finance ( email )

3000 Chemin de la Cote-Sainte-Catherine
Montreal, Quebec H3T 2A7
Canada
514-340-7743 (Phone)
514-340-5632 (Fax)

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