Holder-Extendible Options with Modifiable Underlying-Assets

This article examines a new type of exotic options, namely the “holder-extendible options with modifiable underlying assets”. Compared to the “writer-extendible options with modifiable underlying assets”, which are extended only when they expire out-of-the-money at the initial maturity date, these options help their holders decide freely whether or not to extend their options through the payment of an additional premium. For such European-style options, when the initial underlying asset is replaced by another asset at the same level in continuity, a closed-form pricing formula is derived; in more general cases, analytical formulas are derived to provide estimates for the option values. In addition, a certain number of examples are illustrated to show how these options can be used in corporate financing through warrants, in option pricing
theory, and in capital structure analysis with debt restructuring.
Keywords: Options; Extendible options; Holder-extendible options; Options with multiple underlying assets; Compound options; Pricing and applications of exotic options.
JEL Classifications: G13, G34