Work

Valuation and optimal exercise of derivatives under private information

Year: 2025

Type: article

Abstract: We provide an easy-to-use model that values derivatives for a privately informed agent. We introduce private forward prices that conveniently format private information for inclusion in a standard no-arbitrage framework. This framework yields simple expressions for the privately-informed value of European options. We show that flexible timing of American option exercise can be used to mitigate adverse information or exploit favorable information. Private information may thus cause significant differences between European and American call values, even in the absence of dividends.

Source: Decisions in Economics and Finance

DOI: 10.1007/s10203-025-00519-8

Authors: Jørgen Haug, Tommy Stamland

Institution: Norwegian School of Economics

Language: English

Topic: Stochastic processes and financial applications

Subfield: Finance

Field: Economics, Econometrics and Finance

Domain: Social Sciences

Open Access status: hybrid

Estimated APC paid: $3,290

Funders: Equinor, Norges Handelshøyskole