Valuation and Information Acquisition Policy for Claims Written on Noisy Real Assets

Abstract

This paper studies the e#ects of noise on contingent-claim values, option exercise policies and the incentives to acquire information to improve irreversible exercise decisions. We determine distributional parameters for the conditional expected asset value in which the noise and the underlying asset value dynamics follow normal, lognormal and mean-reverting processes. Option prices are found to depend on the revealed variance of asset price, suggesting that only information that can be acted upon are useful in formulating option exercise policy. To study incentives to acquire costly information, we examine the case of a borrower who holds the default (put) option inherent in a risky discount debt contract. Consistent with classical option pricing results, the value of (purposefully acquired) information is found to be highest at the point in which the claimholder is indi#erent between exercising or not exercising an irreversible (default) option. Under a more general setting where the...

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