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Working papers

 A list of papers I am working on.



On the exercise of American quanto options
Battauz Anna, De Donno Marzia and Sbuelz Alessandro

We provide a comprehensive description of the optimal exercise policies associated with American quanto options. We show that a non-standard exercise policy characterized by a double continuation region may be optimal in the presence of non–positive domestic interest rates. We study empirical examples of fi…nite-maturity American quanto options for which a double continuation region surrounding a non-empty early exercise region exists even if the infinite-maturity early exercise region is empty and the value of the in…finite-maturity option is unbounded. For such empirical examples, we carefully characterize the existence, the monotonicity properties and the asymptotics of the upper and lower critical prices at maturity.

Last change 03/12/2019

American Options and Stochastic Interest Rates

We study infinite-maturity American equity options in a stochastic interest rate framework of Vasicek type (Vasicek (1977)). We allow for a non-zero correlation between the innovations driving the equity price and the interest rate. Importantly, we also allow for the interest rate to assume negative values, which is the case for some investment grade government bonds in Europe in recent years. In this setting we focus on American equity call and put options and characterize analytically their two-dimensional free boundary, i.e. the underlying equity and the interest rate values that trigger the optimal exercise of the option before maturity. We show that non-standard double continuation regions may appear, extending the findings obtained by Battauz et al. (2015) in a constant interest rate framework. Moreover, we contribute by developing a bivariate discretization of the equity price and interest rate processes that converges in distribution as the time step shrinks. The discretization, described by a recombining quadrinomial tree, allows us to compute American equity options' prices and their related free boundaries. In particular, we document the existence of non-standard optimal exercise policies for American call options on a non-dividend-paying equity. We also verify the existence of a non-standard double continuation region for American equity options, and provide a detailed analysis of the associated free boundaries with respect to the time and the current interest rate variables.

Last change 03/12/2019

Earnouts: the real value of disagreement in mergers and acquisitions
Anna BATTAUZ, Stefano GATTI, Annalisa PRENCIPE, and Luca VIARENGO

Earnout agreements link part of the payment of an acquisition to the future performances of the acquired company. They are structured as real options on the future value of the target, and should be valued as such. However, the models used so far do not take into consideration two peculiar sources of risk that affect these contracts: the risk of the bidder's default before the earnout expiration (counterparty risk) and the risk of litigation that might arise in connection to these contracts (litigation risk). We develop an option pricing model that fills this gap. The performed sensitivity analysis and the presented case study show that counterparty risk and litigation risk are significant, because they might have a remarkable impact on the earnout values. The relevance of the model is also given by recently issued accounting standards, which now require contingent payments to be valued at fair value.

Last change 19/07/2016

Last change 12/07/2010