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    Utility-based valuation for underwater employee stock options

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    ZHAO-MASTERS-REPORT.pdf (265.1Kb)
    Date
    2011-12
    Author
    Zhao, Yunjie
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    Abstract
    In this report, we explore the theory behind utility-based valuation of stock options. In particular, we focus on the underwater employee stock options, which give rise to an incomplete-market setting. We begin with basic concepts and terminology in stock-option pricing. Then, we review the valuation by replication process both in the binomial model and the Black-Scholes model. These two methods apply to valuation in the complete-market setting. Then we introduce the concept of utility function and utility maximization in the context of portfolio allocation. An example is worked out to demonstrate how to solve the optimization problem subject to a portfolio constraint. In the end, we explore indifference pricing, i.e., utility-based valuation of stock options in an incomplete single-period binomial model.
    Department
    Mathematics
    Description
    text
    Subject
    Valuation by replication
    Utility-based valuation
    Indifference pricing
    Underwater stock options
    URI
    http://hdl.handle.net/2152/ETD-UT-2011-12-4728
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    University of Texas at Austin Libraries
    • facebook
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    • CONTACT US
    • MAPS & DIRECTIONS
    • JOB OPPORTUNITIES
    • UT Austin Home
    • Emergency Information
    • Site Policies
    • Web Accessibility Policy
    • Web Privacy Policy
    • Adobe Reader
    Subscribe to our NewsletterGive to the Libraries

    © The University of Texas at Austin