Communications of the Japan Association of Real Options and Strategy
Online ISSN : 2189-6585
ISSN-L : 2189-6585
Volume 7, Issue 3
Displaying 1-7 of 7 articles from this issue
Reviewed Papers
  • (1) Bachelier (1900) Model
    Soichiro Moridaira
    2015 Volume 7 Issue 3 Pages 22-31
    Published: 2015
    Released on J-STAGE: January 31, 2019
    RESEARCH REPORT / TECHNICAL REPORT FREE ACCESS
    This paper reviews Bachelier (1900) and related literature up to now. Bachelier (1900) presented the first option pricing model based on his mathematical theory of Brownian motions. His model assumed that the underlying price follows the arithmetic Brownian motion that allows negative asset prices and therefore it does not satisfy no-arbitrage conditions. Samuelson (1965), Smith (1976) and others criticize these points and proposed the more general stochastic process, the Geometric Brownian motion, to overcome these problems. Later, Liu (2007) and Kolman (2013) apply the risk neutral approach to value the option whose underlying asset prices follow the arithmetic Brownian motion, but they still fall on the same problem; violation of no-arbitrage conditions. In this note, I try to propose a new pricing model to resolve this problem and extend Bachelier work based on the general equilibrium analysis, i.e. stochastic discount factor approach. Bachelier (1900) model is still useful in real option analysis and corporate finance because both types of research focus on the cash flow of projects and corporate profits which can take a negative value; i.e. losses. The many pieces of research dealing with the relationship between option and profit or project cash flow are also reviewed
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  • Haruyoshi Ito
    2015 Volume 7 Issue 3 Pages 32-39
    Published: 2015
    Released on J-STAGE: April 13, 2020
    RESEARCH REPORT / TECHNICAL REPORT FREE ACCESS
    This article studies the impact of weather conditions on the financial performance of ski resorts and local governments and proposes a hedging mechanism to manage the exposure. We analyze a unique ski resorts visitor data set. Our analysis shows that maximum snow depth has an inverted-U shaped relationship in regard to the number of visitors to ski resorts while the snow fall has a significantly adverse impact on the profit to the city government. We then design a hedging mechanism for this risk exposure and examine its contribution to the corporate value of the ski resorts and city government. In particular, we use the Wang transform model to incorporate the decision makers’ risk preferences in the evaluation of the snow derivatives. We find that the proposed snow derivatives contribute significantly to ski resorts value if the safety loading offered would be 5%-10%. This low safety loading might be possible contracting by the over-the-counter trade between two parties on which risks concerned have opposite impacts.
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