Valuation of Auction Guarantees in the Art Market

We analyze the guarantees that art-auction houses offer from an options viewpoint. This approach allows us to derive analytical expressions to value the positions involved in such arrangements. We further validate these formulas with a Monte Carlo simulation applied to a realistic example. Finally, we show that the risk associated with such guarantees is lower than what is commonly believed by market practitioners, we also expose the dangers of relying on the Black-Scholes model to value such guarantees, and we introduce a simple risk-reward metric that has intuitive appeal