Utility-based valuation for underwater employee stock options

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.

Name thesis:degree_name

Master of Arts

Level thesis:degree_level

Masters

Discipline thesis:degree_discipline

Mathematics

Grantor

University of Texas at Austin

Year dc:date.issued

2011

Author dc:creator

• Zhao, Yunjie

Advisor dc:contributor.advisor

• Ẑitković, Gordan

Committee member dc:contributor.committeemember

• Cudina, Milica

• Valuation by replication
• Utility-based valuation
• Indifference pricing
• Underwater stock options

Language dc:language.iso

eng

Handle dc:identifier.uri

http://hdl.handle.net/2152/ETD-UT-2011-12-4728

OAI identifier oai:identifier

oai:repositories.lib.utexas.edu:2152/ETD-UT-2011-12-4728