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The lack of transaction data has been identified as one of the major obstacles for the empirical evaluation of real option. Quigg’s study in 1993 was one of the first to empirically estimate the premium for the option of waiting to develop using data from 2,700 land sales in Seattle. This study modified Quigg’s methodology and applied it to estimate the premium for the option of waiting to develop based on a sample of data from 2,286 property transactions in the UK collected over a 14‐year sample period from 1984 to 1997. Based on a one‐factor contingent claim valuation model, we found that the average premiums for the timing options were 28.78 percent for office sector, 25.75 percent for industrial sector and 16.06 percent for retail sector. We also tested the robustness of the theoretical‐based land value estimates in explaining the market‐based land values. The regression results showed a statistically significant relationship in logarithm form between the market‐based residual land value and the model‐based land values (with embedded timing option), with R² of 0.75, 0.79 and 0.82 for office, industrial and the retail sectors respectively.

Option to review land rents to prevailing market rents and option to renew leases for another term are two important options embedded in the public industrial land leases in Singapore, managed by the Jurong Town Corporation (JTC). The land rents of JTC leases are reviewed every year subject to a cap on the land rent increase. The rent cap, which is historically lower than the prevailing market growth rate, widens the gap between the contract rent and the prevailing market rent as the lease progresses. This creates disincentives to the lessor for not exercising the rent review option, because the option is in‐the‐money. The rent gap, on the other hand, is also translated into substantial profit rents for lessees who hold onto the leasehold interests of industrial lands. By assuming two different probability distributions for the ex‐ante prevailing market rents, the profit rents were simulated to derive at the values of a hypothetical 30‐year lease, which range from US$47.93 (S$86.45) per square meter (psm) (Sungei Kadut, Kranji) to US$236.05 (S$425.74) psm (West Coast Highway). Based on these simulated 30‐year leasehold values and assumptions of other input parameters: equated yield (e = 10 percent), risk free rate (R_f = 4.52), volatility of leasehold value (σ = 15 percent), term of lease (T = 30 years) and rental growth cap (g = 7.6 percent), the premiums for the lease renewal options were estimated to be in a range of US$4.55 (S$8.21) psm to US$22.26 (S$40.15) psm.

The purpose of this paper is to demonstrate how crop price insurance premium can be calculated using an option pricing model and how insurers can transfer underwriting risks in the futures market.

Based on data from spot and futures market in China, this paper develops an improved B-S model for the calculation of crop price insurance premium and tests the possibility of hedging underwriting risks by insurance firms in the futures market.

The authors find that spot price of crops in China can be estimated with agricultural commodity futures prices, and can be taken as the insured price for crop price insurance. The authors also find that improved B-S model yields better estimation of crop price insurance premium than traditional B-S model when spot price does not follow geometric Brownian motion. Finally, the authors find that hedging can be one good alternative for insurance firms to manage underwriting risks.

This paper develops an improved B-S model that is data-driven in nature. Insured price of the crop price insurance, or the exercise price used in the B-S model, is estimated from a co-integration model built on spot and futures market price series. Meanwhile, distributional patterns of spot price series, one important factor determining the applicability of B-S model, is factored into the improved B-S model so that the latter is more robust and friendly to data with varied distributions. This paper also verifies the possibility of hedging of underwriting risks by insurance firms in the futures market.

This paper aims to study the impact of land options on the land transfer behaviour of Chinese city governments.

Based on the institutional environment of Hangzhou, China, the option pricing model is used to measure the option value of the trading plots. The effect of the option value on the land transfer price and the timing of transfers are estimated respectively, using the hedonic price model and the survival analysis models.

The results show that the option value has a significant explanation on land price and timing of land transfers. Under the effect of option value, the positive impact of fiscal pressure on the possibility of land transfer weakens. From the perspective of the annual option premium rate, the option premium is closely related to the real estate cycle. Option premiums are higher during booms but lower during recessions and in new urban areas.

By revealing the distinction of land option premiums in different places and times, this paper provides a reference for city governments seeking a balance between real estate regulation and obtaining more land revenue.

By introducing policy variables that reflect the degree of tightness of real estate regulation and indicators of local government financial pressure, the paper discusses the impact of options on the transfer behaviour of local governments in different situations.

This paper recasts the land development problems of Williams (1991) and Quigg (1993) by explicitly dealing with the effects of scale elasticity of unit rental and unit construction cost in a real estate project. Two different diseconomies of scale constraints are imposed on the rental and cost variables. We assume a concave function for the rental variable with respect to the scale of development. Whereas, on the cost side, the diseconomies of scale effect of the variable component of the construction cost is incorporated via a elasticity of scale factor that is larger than unity. The comparative statics simulated positive relationships between the premium that keeps the option of waiting to develop alive and the volatilities of the unit rental and unit construction cost. It was also found that the cost elasticity of scale and the financing cost are factors that increase the premium of the waiting option, whereas, the rental yield factor reduces the incentive of waiting. A high rental yield tends to expedite a development project because the opportunity cost of not developing the land is high. In the case analysis involving a vacant land of 8,000 square meters at Spitafield, East London, a unit rental of £267.2 per square meter (psm) is obtained, which would breakeven a cash flows of the project when the traditional “invest now or never” assumption is made. Compared with the optimal unit rental of £677.0 psm estimated by the real option model, the traditional DCF results tend to accept the feasibility of the real estate project too early and at too low a cut‐off rental.

This paper models the lessee's default options and estimates the economic value of the options for a lessee using a discrete time binomial American option pricing model. Results show a positive relationship of the option premium with the original rent and a negative relationship with the relocation costs. Finds that the default probability is higher for lessees who are more sensitive to rental changes and place less emphasis on the fitting‐out quality. Suggests that rental volatility and rental growth rate are two significant factors that have positive relationships with the default option values. The risk‐free rate, on the other hand, has an inverse relationship with the default option values because a higher risk‐free interest rate reduces the present value of rental savings. Lease term length to expiration has a positive effect on the default option value, implying that the default option premium will decay as the term to expiry is shortened.

Malting barley is an important specialty crop in the Northern Plains and growers mitigate risk with federally subsidized crop insurance and production contracts. The purpose of this paper is to quantify risks growers face due to “coverage gaps” in crop insurance that result in uncertain indemnity payments when their crop does not meet contract specifications.

A stochastic dominance model is developed to evaluate alternative strategies for growers with differing risk attitudes and production practices (irrigation vs dryland).

The results illustrate how alternative crop insurance provisions affect efficient choice sets for growers. Risk premiums for irrigated growers all point to valuations favoring more coverage, contracts, and malting option B. As the crop insurance industry matures in the functions it performs, it will become increasingly more important to address quality attributes.

This paper addresses quality issues and coverage gaps in crop insurance provisions.

A lack of visibility into the manufacturer’s production cost information impedes a retailer’s ability to maximize her own profits, especially when market demand is uncertain. The purpose of this paper is to investigate the use of an option contract within a one-period two-echelon supply chain in the presence of asymmetric cost information.

Based on the principal-agent model, the retailer, acting as a Stackelberg leader, offers a menu of option contracts to mitigate the risk of uncertain demand and reveal asymmetric production cost information. The optimal contract in asymmetric and symmetric information scenarios is derived. Finally, the impact of production costs on the optimal contracts and the actors’ profits is explored by numerical experiments.

By comparing the optimal equilibrium solutions in two scenarios, the authors show that asymmetric cost information has a large impact on the optimal option contract and profits. In addition, information rent is affected by the type differential. The results prove that the level of information asymmetry plays a vital role in option contracts and profits.

Different from the existing literature on private demand information, this paper considers a supply chain with asymmetric cost information in the context of option contracts. Interestingly, not only the production cost but also the probability of a low production cost can affect the option strike price. In addition, from the perspective of the manufacturer, a high cost does not always bring a high information rent. These findings can provide some guidance to decision-makers.

The purpose of this paper is to illustrate a profitable and original index options trading strategy.

The methodology is based on auto regressive integrated moving average (ARIMA) forecasting of the S&P 500 index and the strategy is tested on a large database of S&P 500 Composite index options and benchmarked to the generalized auto regressive conditional heteroscedastic (GARCH) model. The forecasts validate a set of criteria as follows: the first criterion checks if the forecasted index is greater or lower than the option strike price and the second criterion if the option premium is underpriced or overpriced. A buy or sell and hold strategy is finally implemented.

The paper demonstrates the valuable contribution of this option trading strategy when trading call and put index options. It especially demonstrates that the ARIMA forecasting method is a valid method for forecasting the S&P 500 Composite index and is superior to the GARCH model in the context of an application to index options trading.

The strategy was applied in the aftermath of the 2008 credit crisis over 60 months when the volatility index (VIX) was experiencing a downtrend. The strategy was successful with puts and calls traded on the USA market. The strategy may have a different outcome in a different economic and regional context.

Sees the objective of teaching financial management to be to help managers and potential managers to make sensible investment and financing decisions. Acknowledges that financial theory teaches that investment and financing decisions should be based on cash flow and risk. Provides information on payback period; return on capital employed, earnings per share effect, working capital, profit planning, standard costing, financial statement planning and ratio analysis. Seeks to combine the practical rules of thumb of the traditionalists with the ideas of the financial theorists to form a balanced approach to practical financial management for MBA students, financial managers and undergraduates.