Based on the option put-call parity relation, we derive model-free boundary conditions of option time value and option early exercise premium with cash dividends on the underlying stock. The article produces four main results. (1) For European options, the difference in time value between a call option and a put option is the discount interest earned on the exercise price less the present value of cash dividends to be paid before the option expiration. (2) For American options, the difference in time value between a call option and a put option is bounded between the negative amount of the present value of dividends and the discount interest earned on the exercise price. (3) The early exercise premium of an American put option is bounded between zero and the discount interest earned on the exercise price. (4) The early exercise premium of an American call option is bounded between zero and the present value of cash dividends to be paid before the option expiration. From (3) and (4), the difference in early exercise premiums between an American put option and a call option is bounded below bythe negative amount of the present value of cash dividends and bounded above by the discount interest earned on the exercise price. We numerically test these results in the Black-Scholes and binomial tree models. This article contributes to the finance literature. It extends the understanding of option time value and early exercise premium, provides boundary conditions for option-pricing model calibration, and indirectly helps enhance market efficiency and make optimal early exercise decisions, especially when the underlying stock pays cash dividends.

We examine a unique one day lockup constraint in stock markets in China. Buyers of Chinese stocks are subject to a one day lockup and cannot sell their shares until the next day, but warrant traders are free of such restrictions. We demonstrate that the lockup creates a price discount relative to stock value implied by warrants. We show that the discount decreases throughout the trading day and investors tend to purchase stocks when the lockup becomes less binding. We also find the non-marketability discount in the Huaxia 50 ETF market, with help from the newly introduced ETF options in China.

We examine the effects the Chartered Financial Analyst (CFA) designation program has on recommendation performance and career outcomes of the analysts who complete the curriculum and become charterholders. For these analysts, both their recommendation performance and their chances of making the Institutional Investor’s All-America Research Team increase during 1993–2015. These effects are attributable to the CFA program curriculum. The results remain largely stable across the pre- and post-2000 subperiods, and they survive an array of robustness checks.

A borrower whose loan is committed to the securitization process has the ability and incentive to switch lenders if market rates drop during the loan origination period, which creates significant exposure for primary lenders. A simple secondary market contract innovation we call a mortgage rate drop guarantee (MRDG) could shift this risk to the securitizers who represent portfolio investors. Our simulation results indicate this shifting would have improved the risk/return distribution faced by originators without damaging the risk/return position of securitizers during our 1977-2010 sample period. Assuming conservative loan lives and origination periods, and competitive lending markets, the risk reduction features of MRDGs could also have generated significant interest savings for borrowers.

We use an implicit alternating direction numerical procedure to estimate the value of a fixed‐rate mortgage (FRM) with embedded default and prepayment options. The value of FRMs depends on interest rates, the house value, and mortgage maturity. Our numerical results suggest that the joint option value of prepayment and default is considerably high, even at loan origination. We extend the model to include prepayment penalties in FRM valuation. © 2009 Wiley Periodicals, Inc. Jrl Fut Mark 29:840–861, 2009

This paper investigates Black–Scholes call and put option thetas, and derives upper and lower bounds for thetas as a function of underlying asset value. It is well known that the maximum time premium of an option occurs when the underlying asset value equals the exercise price. However, we show that the maximum option theta does not occur at that point, but instead occurs when the asset value is somewhat above the exercise price. We also show that option theta is not monotonic in any of the parameters in the Black–Scholes option-pricing model, including time to maturity. We further explain why the implications of these findings are important for trading and hedging strategies that are affected by the decay in an option’s time premium.

The original put-call parity relations hold under the premise that the underlying security does not pay dividends before the expiration of the options. Similar to Hull (2003), this paper relaxes the non-dividend-paying assumption. The underlying security price in the original European-style put-call parity relation is adjusted downwards by the present value of expected dividends before the option expires. The upper bound of the American-style put-call parity relation is adjusted upwards by the amount of the present value of expected dividends. The results provide theoretical boundaries of options prices and expand application of put-call parity relations to all options on currencies and dividend-paying stocks and stock indices, both European-style and American-style.

This paper makes indirect inference about the time variation in expected stock returns by comparing unconditional sample variances to estimates of expected conditional variances. The evidence reveals more predictability as more information is used, and there is no evidence that predictability has diminished in recent years. Semi-strong-form evidence suggests that time variation in expected returns remains economically important.

We examine the impact of CEO presentations to security analyst societies on trading activity and trading costs for shares on secondary markets. One objective of CEO presentations is to increase the investor base. A second objective is to provide information about the firm, reducing the level of asymmetry. We examine daily volume, number of trades, relative spreads, investor base, and spread components to determine if these meetings reduce information asymmetry. We find that the meetings do not produce any permanent changes in trading activities or costs. In general, business continues as usual immediately following the meeting in terms of volume, spreads, and the level of information asymmetry.

Some warrants are issued with a scheduled increase in their exercise price. This increase, referred to as a ‘step up’ in exercise price, occurs after the warrant is issued but prior to its expiration. The price behaviour of warrants and common stock at the scheduled step up date is examined. The evidence suggests that the market correctly anticipates this event, and that warrant holders exercise (actually, refrain from exercising) rationally.

Both academics and practitioners have a substantial interest in understanding interest in understanding patterns in implied volatility that are recoverable from commodity futures option. Such knowledge enhances their ability to accurately forecast volatility embedded in these high risk option. This paper examines option-implied volatility contained in the heavily traded September corn futures option contracts for ten-year period, 1991-2000. We also test whether a “weekend effect” exists in the market for this contacts. We evaluate the performance of various measures widely employed in the literature to estimate historical volatility. We further report the nature of profit from a short straddle strategy which seek to exploit differences between option-implied and historical volatility.

We examine the market reaction of prices, volume, spreads, and trading location when firms experience events that are totally unanticipated by the equity market in terms of both timing and content. We find that the response time is longer than previous studies have reported. Selling pressure, wider spreads, and higher volume remain significant for over an hour. We also find an immediate price reaction for overnight events; however, the market takes longer to react to events that occur when it is open. These findings may shed light on the efficacy of trading halts.

An option hedge ratio is the sensitivity of an option price with respect to price changes in the underlying stock. It measures the number of shares of stocks to hedge an option position. This article presents a simple derivation of the hedge ratios under the Black‐Scholes option‐pricing framework. The proof is succinct and easy to follow. © 2003 Wiley Periodicals, Inc. Jrl Fut Mark 23:1119–1122, 2003

If option implied volatility is an unbiased, efficient forecast of future return volatility in the underlying asset, then we should be able to predict its path around macroeconomic announcements from responses in cash markets. Regressions show that volatilities rise the afternoon before announcements that move cash markets, and that post–announcement volatilities return to normal as rapidly as cash prices do. Although implied volatilities are predictable, the Treasury options market is efficient since informed traders do not earn arbitrage profits once we account for trading costs.

Managers can decide to reduce a warrant's exercise price. A reduction in exercise price can induce exercise (a conversion-forcing reduction) or not (a long-term reduction). Conversion-forcing firms show an abnormal return of -1.53% on the announcement day but they perform well over the three years following the announcement. This finding suggests that the funds raised from warrant exercise are invested in profitable projects. Long-term reductions show an abnormal return of -1.15% on the announcement day. These firms also perform well following the reduction, which suggests that the lower exercise price restores managerial incentives.

In this paper we examine changes in dollar and relative bid-ask spreads of stocks following large price movements. We investigate large increases and decreases separately and link our results to current market microstructure theories on trading activities and spreads. We also look at changes in volume and selling pressure to interpret the changes in trading activity. Our results show that the market reacts differently to price increases and decreases. For large price decreases, trading increases on the sell side even when spreads have increased. For large price increases, trading increases on the buy side during a period of higher spreads. However, the increases in dollar spreads and price pressure are most pronounced at the end of trading day. Our results are consistent with microstructure models that link trading activities and costs to the level of asymmetric information.

This paper makes indirect inference about the time-variation in expected stock returns by comparing unconditional sample variances to estimates of expected conditional variances. The evidence reveals more predictability as more information is used, more reliable predictability in indexes than large common stocks, and no evidence that predictability has diminished over time. A "strong-form" analysis using options suggests that time-variation in market discount rates are economically important.

Journal of Futures MarketsVolume 18, Issue 4 p. 363-378 An empirical test of the Hull-White option pricing model Charles Corrado, Charles Corrado Department of Finance, University of Missouri-Columbia, Columbia, MO 65201Search for more papers by this authorTie Su, Corresponding Author Tie Su Department of Finance, University of Miami, P.O. Box 248094, Coral Gables, FL 33124-6552Department of Finance, University of Miami, P.O. Box 248094, Coral Gables, FL 33124-6552Search for more papers by this author Charles Corrado, Charles Corrado Department of Finance, University of Missouri-Columbia, Columbia, MO 65201Search for more papers by this authorTie Su, Corresponding Author Tie Su Department of Finance, University of Miami, P.O. Box 248094, Coral Gables, FL 33124-6552Department of Finance, University of Miami, P.O. Box 248094, Coral Gables, FL 33124-6552Search for more papers by this author First published: 07 December 1998 https://doi.org/10.1002/(SICI)1096-9934(199806)18:4<363::AID-FUT1>3.0.CO;2-KCitations: 6AboutPDF ToolsRequest permissionExport citationAdd to favoritesTrack citation ShareShare Give accessShare full text accessShare full-text accessPlease review our Terms and Conditions of Use and check box below to share full-text version of article.I have read and accept the Wiley Online Library Terms and Conditions of UseShareable LinkUse the link below to share a full-text version of this article with your friends and colleagues. Learn more.Copy URL Share a linkShare onEmailFacebookTwitterLinkedInRedditWechat Bibliography Bakshi, G., Cao, C., and Chen, Z. (1997): “Empirical Performance of Alternative Option Pricing Models,” Journal of Finance, 52: 2003–2049. 10.1111/j.1540-6261.1997.tb02749.x Web of Science®Google Scholar Barone-Adesi, G., and Whaley, R. E. 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The Black-Scholes (1973) option pricing model is used to value a wide range of option contracts. However, the model often inconsistently prices deep in-themoney and deep out-of-the-money options. Options’ professionals refer to this phenomenon as a volatility ‘skew’ or ‘smile.’ In this paper, we apply an extension of the Black-Scholes model developed by Jarrow and Rudd (1982) to an investigation of S&P 500 index option prices. We find that non-normal skewness and kurtosis in option-implied distributions of index returns contribute significantly to the phenomenon of volatility skews.

The Black-Scholes* option pricing model is commonly applied to value a wide range of option contracts. However, the model often inconsistently prices deep in-the-money and deep out-of-the-money options. Options professionals refer to this well-known phenomenon as a volatility 'skew' or 'smile'. In this paper, we examine an extension of the Black-Scholes model developed by Corrado and Su that suggests skewness and kurtosis in the option-implied distributions of stock returns as the source of volatility skews. Adapting their methodology, we estimate option-implied coefficients of skewness and kurtosis for four actively traded stock options. We find significantly nonnormal skewness and kurtosis in the option-implied distributions of stock returns.