Exploration of JPMorgan Chooser Option Pricing

Abstract

As the development of the capital market, the derivatives of financial instruments have been active in the financial market. Investors can trade customized derivatives designed to manage increasingly complex risk exposures. Examples of exotic options satisfying demands include the chooser option. Most contracts require the holder to commit to a particular payoff profile at the outset, which may often be unattractive for some potential investors. Therefore, we choose the stocks of JPMorgan and use the Black-Scholes model to simulate the value of the chooser option. This article suggests approximating the value on two periods and aims to set the value of the chooser option of JPMorgan, constructs the reasonable expectation for investors, and enables them to make the proper decision on the chooser options. We provide reliable option values and retains the flexibility of simulation, in that it allows great freedom in decision date when the investors decide which type of option for the underlying assets or a joint process for the asset price, its volatility, and other asset prices. From the simulation results, we conclude that although the chooser option is the same as the traditional option in nature, the chooser option puts off the decision date and makes the payoff less volatile to the movement of the stock market, thus partly hedge the risks of the stock market.