Quantity-Adjusting Options and Forward Contracts (Revised: 29-91)

David Babbel () and Larry Eisenberg ()

Rodney L. White Center for Financial Research Working Papers from Wharton School Rodney L. White Center for Financial Research

Abstract: Quantity-adjusting option and forward contracts deliver a payoff on a variable quantity of underlying. This paper explains the use, pricing and hedging of such contracts and extends them to sequential investment options. These are options which guarantee optimal asset selection at switching points among a fixed set of traded assets.

Applications include domestic equity derivatives held by a foreign investor and hedged into that investor’s home currency. Similar hedges on foreign equities for domestic investors can be constructed using symmetry considerations if the investors are running their own hedge. If, however, the hedge is run by the same investment bank, the problems are not symmetric. Such hedges are not attainable using a buy-and-hold strategy with standard options and currency contracts.

Finally, in the presence of a forward contract on an inflation index, the real value implied by the forward contract of equity derivatives may be hedged.

There are no downloads for this item, see the EconPapers FAQ for hints about obtaining it.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: http://EconPapers.repec.org/RePEc:fth:pennfi:24-91

Access Statistics for this paper

More papers in Rodney L. White Center for Financial Research Working Papers from Wharton School Rodney L. White Center for Financial Research
Contact information at EDIRC.
Series data maintained by Thomas Krichel ().