Contingent claims valuation of optional calling plan contracts in telephone industry

Abstract

This paper presents a valuation methodology for optional calling plan contracts (OCP contracts) on free phone calls in the telephone industry. Contingencies in these OCPs stem from the uncertainty in the accumulated call usage during a given time period. Using a financial contingent claims approach, we investigate the basic nature of the model and extend the model to popular variants of the OCP in the industry. Utilization of the model is not limited to valuation and consequent decision making for the subscribers and provides a useful guideline for telephone companies in designing calling plans and assessing subscribers behavior. © 2002 Elsevier Science Inc. All rights reserved.