Contingent claims on assets with conversion costs.
type: Item
instance of: scholarly article
title: Contingent claims on assets with conversion costs.
zbMATH Open document ID: 1071.91023
DOI: 10.1016/S0378-3758(01)00317-2
author: Enrique Thomann
author: Edward C. Waymire
published in: Journal of Statistical Planning and Inference
publication date: 2003-05-19T00:00:00Z
review text: Contingent claim contracts on natural resources which may involve assets existing in undeveloped states are studied. An undeveloped asset may become negative due to the conversion cost \(c\) given in the contracts. Pricing of such contracts involves natural arbitrage opportunities on undeveloped assets if the developed prices drop below \(c\) and then rise before expiry \(T\). The authors consider the effect on the contract price of requiring a contract settlement (with possible rebates) at the time \(\tau_c = \inf\{t\leq T: S(t) = c\}\). The final pricing equation (with knock-out boundary) is obtained. Mathematically, the success of the approach is based on the martingale localization of the classic theory of Harrison-Pliska. The particular application which serves to motivate the paper is that of pricing federal timber leases. The solution of the cost-modified equation naturally leads to an Asian-type option combined with a down and out barrier.
Mathematics Subject Classification ID: 91B28
Mathematics Subject Classification ID: 91B40
Mathematics Subject Classification ID: 60H30
Mathematics Subject Classification ID: 65M99
zbMATH DE Number: 1912364
zbMATH Keywords: natural resources valuation
zbMATH Keywords: asian options
zbMATH Keywords: barrier options
reviewed by: Serguei V. Solov'ev
MaRDI profile type: Publication
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description: scientific article; zbMATH DE number 1912364