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VALUATION OF EVENT‐CONTINGENT OPTIONS
Author(s) -
Câmara António
Publication year - 2006
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/j.1475-6803.2006.00193.x
Subject(s) - divestment , comparative statics , economics , valuation (finance) , stochastic game , investment (military) , microeconomics , investment decisions , value (mathematics) , event (particle physics) , business , financial economics , actuarial science , finance , behavioral economics , computer science , politics , political science , law , physics , quantum mechanics , machine learning
I study a new class of investment options, event‐contingent options. These are options to invest and divest in projects that are dependent on other projects of the same firm or that are conditioned by projects of other firms in its value chain. I construct payoff functions and derive closed‐form solutions for the value of options to invest contingent on investment (OICI), options to invest contingent on divestment (OICD), options to divest contingent on divestment (ODCD), and options to divest contingent on investment (ODCI). I also derive analytical comparative statics for these option valuation equations and examine their implications on the firm's wealth. I offer examples of event‐contingent options in a global context.