Optimal execution of ASR contracts with fixed notional

TL;DR

This paper analyzes the pricing and optimal execution strategies for ASR contracts with fixed notional, linking optimal execution and exotic option pricing in a novel financial context.

Contribution

It introduces a new framework for valuing and executing ASR contracts with fixed notional, combining optimal execution techniques with exotic option pricing methods.

Findings

Derived a mathematical model for ASR contract pricing.

Identified optimal execution strategies for fixed notional ASR contracts.

Connected ASR pricing to exotic option valuation techniques.

Abstract

Be it for taking advantage of stock undervaluation or in order to distribute part of their profits to shareholders, firms may buy back their own shares. One of the way they proceed is by including Accelerated Share Repurchases (ASR) as part of their repurchase programs. In this article, we study the pricing and optimal execution strategy of an ASR contract with fixed notional. In such a contract the firm pays a fixed notional $F$ to the bank and receives, in exchange, a number of shares corresponding to the ratio between $F$ and the average stock price over the purchase period, the duration of this period being decided upon by the bank. From a mathematical point of view, the problem is related to both optimal execution and exotic option pricing.