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Call options with concave payoffs: An application to executive stock options
Author(s) -
Bae Kwangil,
Kang Jangkoo,
Kim HwaSung
Publication year - 2018
Publication title -
journal of futures markets
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.88
H-Index - 55
eISSN - 1096-9934
pISSN - 0270-7314
DOI - 10.1002/fut.21924
Subject(s) - stock options , incentive , non qualified stock option , stochastic game , stock (firearms) , economics , call option , financial economics , stock price , restricted stock , mathematical economics , stock market , microeconomics , finance , engineering , mechanical engineering , paleontology , horse , biology , series (stratigraphy)
We observe that the incentive effects of traditional stock options can be improved by making the option's payoff concave in the region of a high stock price at maturity. To reflect the concave property, we propose two types of executive stock options: a generalized power option and an ordinary bull spread. Under the [Hall and Murphy ([Hall, B. J., 2000]): American Economic Review 209‐214, Hall and Murphy ([Hall, B. J., 2002]) Journal of Accounting and Economics 33: 3‐42] framework, we show that the generalized power option with high concavity and the ordinary bull spread generate greater incentive effects than those of traditional options or the [Bernard, Boyle, and Chen ([Bernard, C., 2016]): The Journal of Derivatives 23: 9‐20] power executive options.
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