Public health care services in the advanced welfare state: Observations from the Swedish futures study care in society

In 1978 the Swedish Secretariat for Future Studies—a government advisory body for long-term issues of broad societal significance—began its project “Care in Society”. The final project report was published in May 1982. The original purpose of the project was to study how conditions in society affect needs for care in different forms and how these needs are met—informally or through formal institutions. More broadly, the study came to be a general assessment of the welfare state and its growing problems. This article examines findings and proposals from the Swedish report.     

The analysis and valuation of interest rate options

This paper provides a simple, alternative model for the valuation of European-style interest rate options. The assumption that drives the hedging argument in the model is that the forward prices of bonds follow an arbitrary two-state process. Later, this assumption is made more specific by postulating that the discount on a zero-coupon bond follows a multiplicative binomial process. In contrast to the Black-Scholes assumption applied to zero-coupon bonds, the limiting distribution of this process has the attractive features that the zero-bond price has a natural barrier at unity (thus precluding negative interest rates), and that the bond price is negatively skewed. The model is used to price interest rate options in general, and interest rate caps and floors in particular. The model is then generalized and applied to European-style options on bonds. A relationship is established between options on swaps and options on coupon bonds. The generalized model then provides a computationally simple formula, closely related to the Black-Scholes formula, for the valuation of European-style options on swaps.     

American Parisian options

In this article, we describe the various sorts of American Parisian options and propose valuation formulae. Although there is no closed-form valuation for these products in the non-perpetual case, we have been able to reformulate their price as a function of the exercise frontier. In the perpetual case, closed-form solutions or approximations are obtained by relying on excursion theory. We derive the Laplace transform of the first instant Brownian motion reaches a positive level or, without interruption, spends a given amount of time below zero. We perform a detailed comparison of perpetual standard, barrier and Parisian options.     

Valuation of American options in the presence of event risk

This paper studies the valuation of American options in the presence of external/non-hedgeable event risk. When the event occurs, the American option is terminated and a rebate is paid instead of the promised pay-off profile. Consequently, the presence of event risk influences the exercise strategy of the option holder. For the financial market in a diffusion setting, the probabilistic structure in terms of equivalent martingale measures is briefly analysed. Then, for a given equivalent martingale measure the optimal stopping problem of the American option is solved. As a main result, no-arbitrage bounds for American option values in the presence of event risk are derived, as well as hedging strategies corresponding to the no-arbitrage bounds.Received: May 2004, Mathematics Subject Classification: 90C47, 60H30, 60G40JEL Classification: G13, D52, D81The author thanks John Gould and Ross Maller for useful discussions. The author is also grateful to a referee for helpful comments. This research was partially supported by University of Western Australia Research Grant RA/1/485.     

Real Options, (Dis)Investment Decision-Making and Accounting Measures of Performance

This paper suggests that a residual income-type measure of performance can be designed which supports optimal investment and disinvestment decision-making in a real options framework involving the options to wait before investing and to abandon. The measure has a number of advantages and disadvantages. Nonetheless, the balance of advantage versus disadvantage for the proposed measure must be set against the inadequacies of other competing measures of performance and associated organisational designs. Even if the measure of performance suggested is not regarded as practically useful, it has another general advantage – it can be used as a benchmark against which to evaluate other performance measures with regard to their support of optimal investment and disinvestment decision-making in a real options framework.     

Real Options, (Dis)Investment Decision-Making and Accounting Measures of Performance

This paper suggests that a residual income-type measure of performance can be designed which supports optimal investment and disinvestment decision-making in a real options framework involving the options to wait before investing and to abandon. The measure has a number of advantages and disadvantages. Nonetheless, the balance of advantage versus disadvantage for the proposed measure must be set against the inadequacies of other competing measures of performance and associated organisational designs. Even if the measure of performance suggested is not regarded as practically useful, it has another general advantage – it can be used as a benchmark against which to evaluate other performance measures with regard to their support of optimal investment and disinvestment decision-making in a real options framework.     

Efficient,exact algorithms for asian options with multiresolution lattices

Asian options are a kind of path-dependent derivative. How to price such derivatives efficiently and accurately has been a long-standing research and practical problem. This paper proposes a novel multiresolution (MR) trinomial lattice for pricing European- and American-style arithmetic Asian options. Extensive experimental work suggests that this new approach is both efficient and more accurate than existing methods. It also computes the numerical delta accurately. The MR algorithm is exact as no errors are introduced during backward induction. In fact, it may be the first exact discrete-time algorithm to break the exponential-time barrier. The MR algorithm is guaranteed to converge to the continuous-time value. This revised version was published online in June 2006 with corrections to the Cover Date.     

Some calculations for Israeli options

Recently Kifer (2000) introduced the concept of an Israeli (or Game) option. That is a general American-type option with the added possibility that the writer may terminate the contract early inducing a payment exceeding the holders claim had they exercised at that moment. Kifer shows that pricing and hedging of these options reduces to evaluating a saddle point problem associated with Dynkin games. In this short text we give two examples of perpetual Israeli options where the solutions are explicit.Received: December 2002, Mathematics Subject Classification: 90A09, 60J40, 90D15JEL Classification: G13, C73I would like to express thanks to Chris Rogers for a valuable conversation.     

Options with Constant Underlying Elasticity in Strikes

Closed-form solutions are derived and interpreted for European options, with stochastic strike prices, that maintain constant elasticity of the strike with respect to the price of the underlying asset. We refer to such options as CUES. CUES preserve the relative shares of exercise price risk for both the buyer and writer of the option, regardless of whether the price of the underlying asset moves up or down. The relevance of the CUES concept is established through applications in two distinct fields. First, it is established that CUES-like options are embedded in private equity investments. This concept is then used in a novel application to determine the equity share of a private company corresponding to a given level of investment. Secondly, the advantages that CUES would provide over traditional executive stock option grants are considered and it is shown that CUES can provide enhanced incentive-alignment without increasing options expense to the company. JEL Classification: G130     

Pricing methods for α-quantile and perpetual early exercise options based on Spitzer identities

We present new numerical schemes for pricing perpetual Bermudan and American options as well as α-quantile options. This includes a new direct calculation of the optimal exercise boundary for early-exercise options. Our approach is based on the Spitzer identities for general Lévy processes and on the Wiener–Hopf method. Our direct calculation of the price of α-quantile options combines for the first time the Dassios–Port–Wendel identity and the Spitzer identities for the extrema of processes. Our results show that the new pricing methods provide excellent error convergence with respect to computational time when implemented with a range of Lévy processes.     

Analyzing firms' strategic investment decisions in a real options' framework

Within the context of investment under uncertainty, the real options literature has led to models that capture primarily the time to wait flexibility of monopolistic corporations' investment decision. In this paper, we propose an approach which relies on barrier options to model production and/or sales delocalization flexibility for multinational enterprises making decisions under exchange rate uncertainty. We then extend the model by introducing game theoretic considerations to show how the information set and the competitive structure of the market may lead firms to act strategically and exercise their delocalization options preemptively at an endogenously fixed exchange rate barrier.     

Can we forecast the implied volatility surface dynamics of equity options? Predictability and economic value tests

We examine whether the dynamics of the implied volatility surface of individual equity options contains exploitable predictability patterns. Predictability in implied volatilities is expected due to the learning behavior of agents in option markets. In particular, we explore the possibility that the dynamics of the implied volatility surface of individual stocks may be associated with movements in the volatility surface of S&P 500 index options. We present evidence of strong predictable features in the cross-section of equity options and of dynamic linkages between the volatility surfaces of equity and S&P 500 index options. Moreover, time-variation in stock option volatility surfaces is best predicted by incorporating information from the dynamics in the surface of S&P 500 options. We analyze the economic value of such dynamic patterns using strategies that trade straddle and delta-hedged portfolios, and find that before transaction costs such strategies produce abnormal risk-adjusted returns.