The Valuation of Share Ratio Contracts

J. OF FINANCIAL ENGINEERING, Vol. 5 No. 4, December 1996

Posted: 16 Jan 1997

See all articles by John C. Handley

John C. Handley

University of Melbourne - Department of Finance

Abstract

Share ratio contracts are a new derivative security which recently commenced trading on the Australian Stock Exchange (ASX). The payoff on a share ratio contract is based on the performance of an underlying share relative to an underlying benchmark index. The security provides investors with an opportunity to eliminate market risk and to trade solely on a company's specific risk. This article uses a Black-Scholes type hedging argument within a continuous time framework to derive an analytical solution for the current value of a share ratio contract. The sensitivity of the value of share ratio contracts to the underlying variables is also examined.

JEL Classification: G13

Suggested Citation

Handley, John C., The Valuation of Share Ratio Contracts. J. OF FINANCIAL ENGINEERING, Vol. 5 No. 4, December 1996, Available at SSRN: https://ssrn.com/abstract=8044

John C. Handley (Contact Author)

University of Melbourne - Department of Finance ( email )

Victoria
Parkville, Victoria 3010 3010
Australia
(61) 3 8344 7663 (Phone)
(61) 3 8344 6914 (Fax)

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