Options as Silver Bullets : Valuation of Term Loans, Inventory Management, Emissions Trading and Insurance Risk Mitigation using Option Theory

Research output: Journal Publications and ReviewsRGC 21 - Publication in refereed journalpeer-review

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Original languageEnglish
Number of pages41
Journal / PublicationAnnals of Operations Research
Online published18 Mar 2022
Publication statusOnline published - 18 Mar 2022

Abstract

Models to price long term loans in the securities lending business are developed. These longer horizon deals can be viewed as contracts with optionality embedded in them. This insight leads to the usage of established methods from derivatives theory to price such contracts. Numerical simulations are used to demonstrate the practical applicability of these models. The techniques advanced here can lead to greater synergies between the management of derivative and delta-one trading desks, perhaps even being able to combine certain aspects of the day to day operations of these seemingly disparate entities. These models are part of one of the least explored, yet profit laden, areas of modern management. A heuristic is developed to mitigate any loss of information, which might set in when parameters are estimated first and then the valuations are performed, by directly calculating valuations using the historical time series. This approach to valuations can lead to reduced models errors, robust estimation systems, greater financial stability and economic strength. An illustration is provided regarding how the methodologies developed here could be useful for inventory management, emissions trading and insurance risk mitigation. All these techniques could have applications for dealing with other financial instruments, non-financial commodities and many forms of uncertainty.

Research Area(s)

  • Securities lending, Term loan, Derivative theory, Model errors, Inventory management, Emissions trading, Financial stability, Uncertainty, Information systems, MONTE-CARLO APPROACH, REAL OPTIONS, AMERICAN OPTIONS, CONTINGENT CLAIMS, BARRIER OPTION, STOCK RETURNS, SUPPLY CHAIN, KNOCK-IN, CONVERGENCE

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Full text of this publication does not contain sufficient affiliation information. Research Unit(s) information for this record is based on his previous affiliation.