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Valuing the Option to Purchase an Asset at a Proportional Discount
Author(s) -
Gu Anthony Yanxiang
Publication year - 2002
Publication title -
journal of financial research
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.319
H-Index - 49
eISSN - 1475-6803
pISSN - 0270-2592
DOI - 10.1111/1475-6803.00006
Subject(s) - asian option , asset (computer security) , real estate , economics , call option , value (mathematics) , dividend , put option , discounting , valuation of options , actuarial science , financial economics , business , microeconomics , finance , computer science , computer security , machine learning
I analyze the value of a nonstandard call option that allows the holder to purchase an underlying asset at a discount proportional to the asset's market price. Several applications for this type of option exist, including its use in employee compensation contracts. I derive the value of this option for a dividend‐paying asset and for an option whose exercise price reflects a time‐varying discount factor. The derived value incorporates the optimal time at which the option should be exercised. One application of this option relates to a residential real estate program in China.