Please use this identifier to cite or link to this item: https://scholarbank.nus.edu.sg/handle/10635/234376
Title: PRICE APPRECIATION GUARANTEE: AN OPTION PRICING APPROACH
Authors: SHI MEIYUN
Issue Date: 2006
Citation: SHI MEIYUN (2006). PRICE APPRECIATION GUARANTEE: AN OPTION PRICING APPROACH. ScholarBank@NUS Repository.
Abstract: Property Enterprises Development has offered a price appreciation guarantee for its pricey Costa del Sol development in March 2002. This marketing scheme assures the buyers of a 10 per cent price appreciation at the end of the scheme in December 2003. Under the scheme, a comparison will be made between the purchase price and a valuation on 30m of December 2003. If the market value of the unit has not gone up by at least 10 per cent, the developer will pay the buyer the difference in cash. The price appreciation guarantee is effectively a European put option. This is an interesting marketing scheme as the developer has certain calculated risks for assuring the buyer of capital appreciation. Thus, this dissertation aims to work out the put value embedded in the price appreciation guarantee empirically and theoretically. The empirical put value is calculated as the difference between the purchase price and the market value. The theoretical put value is determined by the Black-Scholes Formula and Binomial Tree. The findings showed that the empirical put value is lower than the theoretical put value If the theoretical put value is accurate, the amount actually paid for the property will be less than the open market value. Therefore, the high purchase price is mainly due to the put premium. On the other hand, if the empirical put value is accurate, the volatility and risk-free interest rate used in the calculation will have to be lower and higher respectively. The findings also showed that the put option is overpriced and the buyers are under compensated for holding the put option. The buyers would be better off purchasing other property in the close proximity as they can buy low and sell high during the validity of the scheme. Hence, the price appreciation guarantee is merely a marketing gimmick.
URI: https://scholarbank.nus.edu.sg/handle/10635/234376
Appears in Collections:Bachelor's Theses

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