Call options with concave payoffs: An application to executive stock options

Kwangil Bae, Jangkoo Kang and Hwa‐Sung Kim

Journal of Futures Markets, 2018, vol. 38, issue 8, 943-957

Abstract: We observe that the incentive effects of traditional stock options can be improved by making the option's payoff concave in the region of a high stock price at maturity. To reflect the concave property, we propose two types of executive stock options: a generalized power option and an ordinary bull spread. Under the [Hall and Murphy (): American Economic Review 209‐214, Hall and Murphy () Journal of Accounting and Economics 33: 3‐42] framework, we show that the generalized power option with high concavity and the ordinary bull spread generate greater incentive effects than those of traditional options or the [Bernard, Boyle, and Chen (): The Journal of Derivatives 23: 9‐20] power executive options.

Date: 2018
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