Variable purchase options

Abstract

This paper examines the design and pricing of an innovative derivative asset known as a variable purchase option ("VPO"). A VPO is a call option issued by a corporation on a stochastic number of shares of its common stock. The key feature of the security is that it is ex-ante certain to be exercised by rational investors at maturity, at which time the corporation is certain to issue a fixed dollar amount of new equity capital. A VPO therefore provides a corporation with an alternative to underwriting as a means to guarantee the success of a future equity offering. © 2001 Kluwer Academic Publishers.