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Pricing average price options for the 1990 Mexican and Venezuelan recapture clauses

Author

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  • Claessens, Stijn
  • van Wijnbergen, Sweder

Abstract

This paper derived closed form solutions for the pricing of options on average prices and recapture clauses. On this basis, the values of recapture clauses in the Mexico and Venezuela agreements under alternative assumptions regarding the state variable underlying the clauses are estimated. The paper shows that the sensitivity of the values of the recapture clauses with respect to the stochastic process of the underlying variable is different than expected. The more"stationary"the process driving the underlying variable becomes, the more valuable the recapture clause becomes. The reason is that the effect of an increasing variance on the value of the recapture clauses is analytically unclear since in the two agreements the clauses are"collars", bounded above and below. Only in the empirical application does it show that increasing the variance reduces the value of the collar.

Suggested Citation

  • Claessens, Stijn & van Wijnbergen, Sweder, 1990. "Pricing average price options for the 1990 Mexican and Venezuelan recapture clauses," Policy Research Working Paper Series 541, The World Bank.
    • Handle: RePEc:wbk:wbrwps:541
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    References listed on IDEAS

    as
    1. Fischer, Stanley, 1978. "Call Option Pricing when the Exercise Price Is Uncertain, and the Valuation of Index Bonds," Journal of Finance, American Finance Association, vol. 33(1), pages 169-176, March.
    2. Leonardo Bartolini & Avinash Dixit, 1991. "Market Valuation of Illiquid Debt and Implications for Conflicts among Creditors," IMF Staff Papers, Palgrave Macmillan, vol. 38(4), pages 828-849, December.
    3. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-654, May-June.
    4. Margrabe, William, 1978. "The Value of an Option to Exchange One Asset for Another," Journal of Finance, American Finance Association, vol. 33(1), pages 177-186, March.
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    Cited by:

    1. Hayri, Aydin, 2000. "Debt relief," Journal of International Economics, Elsevier, vol. 52(1), pages 137-152, October.

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