Investors may include volatile foreign equity options or warrants on LDC debt to increase portfolio returns. This paper creates theoretical models for Latin American options, including a telecommunications firm in Mexico, an oil company in Brazil, foreign equity in Argentina or Costa Rica, and warrants on LDC debt. This is an under-researched topic in an area of strategic importance to global business. The paper provides a conceptual framework for empirical analysis. We draw on stochastic calculus to equate utility functions of investors with the price distributions of underlying assets to obtain optimal call prices. The call price for a telecommunications firm in Mexico is a combination of volatile equity valued in a modified Black-Scholes model, and low-risk currency in a drift-diffusion model. The call price for foreign equity on a Brazilian oil stock is based on oil prices, with spot prices determined by the oversupply of oil, news of oil forecasts, and the Canadian dollar-US dollar exchange rate, while futures prices are determined by news of oil forecasts and oversupply. A currency band is envisioned in Costa Rica with a Legendre integral-based currency model complementing a Black-Scholes options equity model. Calls on an energy producer in Argentina are based on equity in a Poisson jump process, and a noncontinuous semi martingale for currency. Utility functions for warrants on LDC debt as affine transformations consist of [threshold return+(the Arrow-Pratt coefficient of risk-aversion, or coefficient of risk taking)*(additional return beyond the threshold return)].
Options, LDC Debt, Utility Theory, Foreign Equity Options, Warrants