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The Pricing of Low Exercise Price Options

Author

Listed:
  • 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)

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.

Suggested Citation

  • Stephen A. Easton & Sean M. Pinder, 1998. "The Pricing of Low Exercise Price Options," Australian Journal of Management, Australian School of Business, vol. 23(2), pages 203-212, December.
    • Handle: RePEc:sae:ausman:v:23:y:1998:i:2:p:203-212
    DOI: 10.1177/031289629802300205
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    References listed on IDEAS

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    4. David C. Heath & Robert A. Jarrow, 2008. "Ex-Dividend Stock Price Behavior and Arbitrage Opportunities," World Scientific Book Chapters, in: Financial Derivatives Pricing Selected Works of Robert Jarrow, chapter 3, pages 47-60, World Scientific Publishing Co. Pte. Ltd..
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