Practical valuation of options on durable goods

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Abstract

Manufacturers and retailers in markets with a secondary market continually struggle to differentiate their products and increase the perceived value of their offerings to consumers. Prior literature presented the marketing rationale for car industry manufacturers and dealers to offer new car buyers options to buy a new car at a predetermined price or a discount, or to sell the car they buy now at a guaranteed fixed price in the future, at the next purchase event. Previous publications often avoided a systematic valuation of such options. An exception is Afik et al. [2012] (ALY), presenting rigorous mathematical expressions for mathematically tractable price processes. When the valuation of more complex options is required, developing mathematical tools such as those of ALY becomes a Herculean effort and often mathematically impossible. This article, focuses on the development and application of Monte Carlo valuation schemes for such options, presenting a very flexible and easy methodology to apply a numerical solution to this mathematical challenge.

Original languageEnglish
Pages (from-to)95-105
Number of pages11
JournalJournal of Derivatives
Volume22
Issue number3
DOIs
StatePublished - 1 Mar 2015

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