This thesis applies the concept of cost e ciency to the design of executive compensation.
In a classical Black-Scholes framework, we are able to express the cost e cient counterpart
of the Asian Executive Option explicitly, and design a payo that has the same distribution
as the Asian Executive Indexed Option but comes at a cheaper price. The cost e cient
counterpart of the latter option is not analytically tractable, but we are able to simulate
its price.
Furthermore, we extend the study of these two types of options in the presence of
stochastic interest rates modeled by a Vasicek process. We are able to derive new closedform
pricing formulas for these options. A framework for crafting the state price process
is introduced. From here, an explicit expression for the state process is given and its
distribution is derived.
Using the pricing formulas and the state price process, we are then able to simulate
the prices of the corresponding cost e cient counterparts in a stochastic interest rate
environment.
We conclude with some avenues for future research.
| Identifer | oai:union.ndltd.org:WATERLOO/oai:uwspace.uwaterloo.ca:10012/6121 |
| Date | January 2011 |
| Creators | Chen, Jit Seng |
| Source Sets | University of Waterloo Electronic Theses Repository |
| Language | English |
| Detected Language | English |
| Type | Thesis or Dissertation |
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