Reset Put Options: Valuation, Risk Characteristics, and an Application

Abstract

A reset put option is similar to a standard put option except that the exercise price is reset equal to the stock price on the pre‐specified reset date if this stock price exceeds the original exercise price. In this paper we derive a valuation for Mula for a reset put option and present a range of comparative statics designed to highlight the differences between a reset put and a standard put We also develop a numerical technique for valuing American‐style reset puts. Finally, we apply our valuation results to assess the interest rate premiums embedded in the Geared Equity Investments offered by Macquarte Bank.