The Pricing of Low Exercise Price Options

Stephen A. Easton and Sean M. Pinder
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Stephen A. Easton: Department of Accounting and Finance, University of Newcastle, Callaghan NSW 2308; E†mail: cmspi@cc.newcastle.edu.au
Sean M. Pinder: Department of Accounting and Finance, University of Newcastle, Callaghan NSW 2308; E†mail: cmspi@cc.newcastle.edu.au

Australian Journal of Management, 1998, vol. 23, issue 2, 203-212

Abstract: This paper examines the pricing of Low Exercise Price Options (LEPOs) listed on the Australian Stock Exchange. The cost of carrying model is used to calculate theoretical prices which are then compared to the price at which actual trades occurred. The results indicate that LEPO trades, that are unaffected by dividends, may be underpriced relative to the underlying shares. A possible reason for this may be the difficulty associated with short†selling shares in the Australian market.

Keywords: LOW EXERCISE PRICE OPTIONS; SHORT†SELLING; OPTIONS; FUTURES (search for similar items in EconPapers)
Date: 1998
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Persistent link: https://EconPapers.repec.org/RePEc:sae:ausman:v:23:y:1998:i:2:p:203-212

DOI: 10.1177/031289629802300205

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