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Owing to the limited service capacity of express delivery providers, most online retailers have to reject many orders during hot selling seasons. In this paper, we consider an express delivery service supply chain consisting of an express delivery provider and an online retailer whereby the selling season includes both regular periods and online sales periods. Utilizing a modified newsvendor model, we derive the express delivery provider's optimal capacity decision and find that the overloading problem cannot be avoided because delivery service cannot be inventoried. To solve such a problem, we introduce an option contract to coordinate the supply chain. By allowing the online retailer to book the capacity, the express delivery provider can rent capacity from a third party in advance. Results show this approach can mitigate the problem significantly. We also extend our model to a supply chain consisting of a delivery provider and two retailers.

We investigate the relationship between ex ante total skewness and holding returns on individual equity options. Recent theoretical developments predict a negative relationship between total skewness and average returns, in contrast to the traditional view that only coskewness is priced. We find, consistent with recent theory, that total skewness exhibits a strong negative relationship with average option returns. Differences in average returns for option portfolios sorted on ex ante skewness range from 10% to 50% per week, even after controlling for risk. Our findings suggest that these large premiums compensate intermediaries for bearing unhedgeable risk when accommodating investor demand for lottery-like options.

More than 80% of U.S. syndicated loans contain at least one fee type and contracts typically specify a menu of spreads and fee types. We test the predictions of existing theories on the main purposes of fees and provide supporting evidence that: (1) fees are used to price options embedded in loan contracts such as the drawdown option for credit lines and the cancellation option in term loans, and (2) fees are used to screen borrowers based on the likelihood of exercising these options. We also propose a new total-cost-of-borrowing measure that includes various fees charged by lenders.

We model demand-pressure effects on option prices. The model shows that demand pressure in one option contract increases its price by an amount proportional to the variance of the unhedgeable part of the option. Similarly, the demand pressure increases the price of any other option by an amount proportional to the covariance of the unhedgeable parts of the two options. Empirically, we identify aggregate positions of dealers and end-users using a unique dataset, and show that demand-pressure effects make a contribution to wellknown option-pricing puzzles. Indeed, time-series tests show that demand helps explain the overall expensiveness and skew patterns of index options, and cross-sectional tests show that demand impacts the expensiveness of single-stock options as well.

A seller designs a mechanism to sell a single object to a potential buyer whose private type is his incomplete information about his valuation. The seller can disclose additional information to the buyer about his valuation without observing its realization. In both discrete-type and continuous-type settings, we show that discriminatory disclosure—releasing different amounts of additional information to different buyer types—dominates full disclosure in terms of seller revenue. An implication is that the orthogonal decomposition technique, while an important tool in dynamic mechanism design, is generally invalid when information disclosure is part of the design.

The uncertainty associated with the location, severity and timing of disaster makes it difficult for the humanitarian organization (HO) to predict demand for the aid material and thereby making the relief material procurement even more challenging. This research explores whether options contract can be used as a mechanism to aid the HO in making procurement of relief material less challenging by addressing two main issues: inventory risk for buyers and over-production risk for suppliers. Furthermore, a contracting mechanism is designed to achieve coordination between the HO and aid material suppliers in the humanitarian supply chain through optimal pricing. The options contract is modelled as a stylized version of the newsvendor problem that allows the HO to adjust their order quantity after placing the initial order at the beginning of the planning horizon. This flexibility helps to mitigate the risk of both overstocking and understocking for the HO as well as the risk of overproduction for the supplier. Our results indicate that the optimal values for decision parameters are not “point estimates” but a range of prices, which can facilitate negotiation between the two parties for appropriate selection of contract parameters under an options contract. The results imply that options contract can aid in the decentralized approach of fixing the prices between the HO and the supplier, which in turn would help in achieving systemic coordination.

Commodity derivatives are becoming an increasingly important part of the global derivatives market. Here we develop a tractable stochastic volatility model for pricing commodity derivatives. The model features unspanned stochastic volatility, quasi-analytical prices of options on futures contracts, and dynamics of the futures curve in terms of a low-dimensional affine state vector. We estimate the model on NYMEX crude oil derivatives using an extensive panel data set of 45,517 futures prices and 233,104 option prices, spanning 4082 business days. We find strong evidence for two predominantly unspanned volatility factors.

We analyse the use of options for online advertisement publishers. By providing a discount or rewards to advertisers, publishers can utilise their uncertain service capacity, page-views, more efficiently. We use Generalised Nash Bargaining to study the feasibility of the option contract and solve for an optimal value for the option price. We compare the revenues and benefits from advertisements under the option contract, with those without the options using numerical studies. We also study the impact of pricing and other components in the game on the optimal option price, the publisher's revenues, and the advertiser's benefits from the advertisements.

This paper investigates informed trading on stock volatility in the option market. We construct non-market maker net demand for volatility from the trading volume of individual equity options and find that this demand is informative about the future realized volatility of underlying stocks. We also find that the impact of volatility demand on option prices is positive. More importantly, the price impact increases by 40% as informational asymmetry about stock volatility intensifies in the days leading up to earnings announcements and diminishes to its normal level soon after the volatility uncertainty is resolved.

The Paris Agreement (PA) opens for parties to use Internationally Transferred Mitigation Outcomes (ITMOs) for implementing their Nationally Determined Contributions (NDCs). This paper analyzes spot, forward and options market trading of ITMOs up to the end of the first PA trading period (2030), given uncertainty about (1) the fulfillment of parties’ NDC targets, and (2) the existence and functioning of the ITMO markets, as ITMO banking beyond 2030 is not allowed. Closed-form solutions are derived for options trading and its welfare impacts given uniform distributions of parties’ uncertainties about fulfilling their individual commitments. Access to call options for late ITMO purchases leads to larger forward ITMO sales or less current mitigation, help parties stay in NDC compliance in 2030, brings early revenue to low-income parties, and is welfare enhancing for all parties. Access to put options for late ITMO sales is less important, and will not be used when put options are not subsidized and parties are risk neutral. The ITMO markets can be enabled by donor-provided climate finance. Effectively functioning ITMO markets can dramatically reduce parties’ costs of achieving their NDCs, and could increase parties’ ambitions, then also reducing global greenhouse gas emissions under the agreement.