valuation of foreign currency options some empirical tests this paper investigates the efficiency of the market for foreign currency options with the help of a modified version of the black scholes model the evidence in the ex post tests is inconsistent with this hypothesis since we find a large number of opportunities for abnormal profits a second set of tests is conducted on an ex ante basis to determine whether these profit opportunities exist even if the execution of the strategy is delayed by one day the evidence from these tests provides more support for the hypothesis of market efficiency

on the pricing of european and american foreign currency options a clarification abstract this paper amends misprints in adams watt 1987 of simulated american foreign currency call prices and for purposes of completeness provides simulation results for corresponding european calls and european and american puts on spot foreign exchange

the pricing of foreign currency options this study examines the assumption that the exchange rate follows a log normal probability distribution and it tests whether different stochastic specifications translate into important differences in implied option prices we investigate a class of processes which includes the log normal probability distribution as a limiting case none of the models performs particularly well the main problem appears to be that the volatility estimates from actual exchange rate data are significantly smaller than those implied by observed option prices la formation du prix des options sur des devises etrangeres cette etude examine le pos tulat que le taux de change suit une courbe de probabilite log normale et verifie si des specifications stochastiques differentes se traduisent en des diff6rences importantes dans les prix des options qui en decoulent les auteurs examinent une famille de processus dont le processus log normal est un cas limite aucun des modeles ne donne des resultats particu lierement bons le probleme principal semble etre que la volatilite des evaluations a partir des donnees sur les taux de change reel est plus faible et de maniere significative que celle des evaluations derivees des prix d options observes

50th anniversary article option pricing valuation models and applications this paper surveys the literature on option pricing from its origins to the present an extensive review of valuation methods for european and american style claims is provided applications to complex securities and numerical methods are surveyed emphasis is placed on recent trends and developments in methodology and modeling

realignment risk and currency option pricing in target zones abstract this paper extends the krugman target zone model by including a realignment mechanism various properties of that realignment mechanism are discussed the movement of the exchange rate is governed both by a wiener process on fundamental and by a poisson jump process with endogenous realignment size the realignment mechanism is such that except in cases where a speculative attack occurs no jump in fundamental is needed to accompany the jump in the exchange rate a risk neutral valuation of currency options is constructed some properties of option values under realignment risk are illustrated by numerical results

tests of the foreign exchange risk premium using the expected second moments implied by option pricing abstract this paper utilizes the second moment expectations implied by currency option pricing to demonstrate that these expectations are systematically related to expected return differentials across assets denominated in different currencies because the measured deviations from uncovered interest rate parity are tied to variables which theory links to the risk premium the results provide substantial evidence that a risk premium does indeed exist as opposed to the alternative of a violation of rational expectations however like previous attempts the data do not support an explicit mean variance formulation of the risk premium

assessing credit risk in a financial institution s off balance sheet commitments the first part of this paper presents a general approach to valuing a financial institution s contracts when there is credit risk the approach uses contingent claims pricing theory and is particularly appropriate for an off balance sheet contract such as a swap that can have either a positive or a negative value to the counterparty the second part of the paper extends the analysis by considering the problem faced by bank supervisory authorities of determining capital requirements for off balance sheet contracts

pricing european average rate currency options abstract this paper develops a simple methodology that yields closed form analytical approximations for valuing european option claims involving the arithmetic average of future foreign exchange rates the main advantage of the approach is that it avoids the need to adopt time consuming numerical procedures the precision of the resulting formula and the distributional assumption that underlies it is examined by way of monte carlo simulations jel f31

the american put option valued analytically an analytic solution to the american put problem is derived herein the hedge ratio and other derivatives of the solution are presented the formula derived implies an exact duplicating portfolio for the american put consisting of discount bonds and stock sold short the formula is extended to consider put options on stocks paying cash dividends a polynomial expression is developed for evaluating these formulae values and hedge ratios for puts on both dividend and nondividend paying stocks are calculated tabulated and compared with values derived by numerical integration and binomial approximation as with european options evaluating an analytic formula is more efficient than approximating the stock price process or the partial differential equation by binomial or finite difference methods finally applications of this american put solution are discussed

efficiency tests of the foreign currency options market based on a new options transactions data base from the philadelphia stock exchange foreign currency options market this paper examines the importance of the effect of nonsynchronous prices and transaction costs on the usual option market efficiency tests the tests conducted are based on the transaction cost adjusted early exercise and put call parity pricing boundaries applicable to the american foreign currency options market the test results show that the put call parity boundary tests are sensitive to both nonsynchronous prices and transaction costs the early exercise boundary tests are sensitive to transaction costs but are not very sensitive to simultaneity of the option price and the underlying spot price under the no transaction costs scenario a large number of early exercise boundary violations is found even when simultaneous spot and option prices are used these violations disappear when actual transaction costs are taken into account

incentive schemes with multiple agents and bankruptcy constraints abstract we explore the effects of bankruptcy constraints on incentive schemes when two risk neutral agents operate in correlated environments our focus is on the subgame equilibrium in which each agent is induced via a direct mechanism to truthfully reveal his private information as a nash response to truth telling by his counterpart we identify a class of examples in which in contrast to the case where the agents are risk averse the nash constraints induce a subgame dominant strategy equilibrium thus implementation via direct mechanisms is feasible for this class more generally however the truth telling nash equilibrium may be subgame dominated so the question of implementation via direct mechanisms remains a delicate one

systematic jump risks in a small open economy simultaneous equilibrium valuation of options on the market portfolio and the exchange rate abstract the valuation of stock options and currency options has witnessed an explosion of new development in the past 20 years these models set up either in a partial equilibrium or a general equilibrium framework have certainly enriched our understanding of option valuation in one way or the other however the main drawback of these models is that stock options and currency options are analyzed in separate contexts the co movement of the stock market and the currency market is absent from the option valuation analysis such co movement is extremely important and is best illustrated by the southeast asian financial crisis to overcome this drawback this paper uses an equilibrium model to investigate the joint dynamics of the exchange rate and the market portfolio in a small open monetary economy with jump diffusion money supplies and aggregate dividends it is shown that the exchange rate and the market portfolio are strongly correlated since both are driven by the same economic fundamentals furthermore options on the exchange rate and the market portfolio are evaluated in the same equilibrium context the analysis shows that parameters describing the same economic fundamentals have very different effects on currency and stock options

financial innovations and arbitrage pricing in economies with frictions revisited abstract existing literature points to the role of market frictions in providing motivations for financial innovations in this paper we study the effectiveness of the arbitrage pricing approach and the design and pricing of innovated securities in economies with restrictions on short sales in the process we also define the no arbitrage conditions that is appropriate for such economies the differences between our results and chen s 3 are pointed out when appropriate journal of economic literature classification numbers c61 g10 g12 g20

biases in option prices abstract this paper examines a european call model of option pricing over a data set which does not suffer from the early exercise problems that have plagued earlier studies of call options on common stocks we specifically examine a data set of american call prices on spot foreign exchange for which it is plausible to apply an adjusted version of the garman kohlhagen 1983 and grabbe 1983 european call option model we make adjustments for interest rate risk and find that the model is nearly unbiased in the valuation of foreign currency options we conclude that the geske roll 1984 conjecture about dividend uncertainty creating biases in stock option prices holds analogously in the foreign currency option market interest rate differential risk analogous to risky dividends thus appears to be an important element in the valuation of foreign currency options

an analysis of oil production by opec countries persistence breaks and outliers this study examines the time series behaviour of oil production for opec member countries within a fractional integration modelling framework recognizing the potential for structural breaks and outliers the analysis is undertaken using monthly data from january 1973 to october 2008 for 13 opec member countries the results indicate there is mean reverting persistence in oil production with breaks identified in 10 out of the 13 countries examined thus shocks affecting the structure of opec oil production will have persistent effects in the long run for all countries and in some cases the effects are expected to be permanent

corporate issues of foreign currency exchange warrants a case study of financial innovation and risk management abstract we argue that hedging and risk management activities of modern corporations arise as a direct consequence of attempts to create shareholder wealth through financial innovation we formalize this argument by examining in detail corporate issues of foreign currency exchange warrants we then focus on one multiple issuer to demonstrate how the foreign exchange risk created by the sale of the warrants can be eliminated the use of off balance sheet risk management techniques to lock in the benefits of selling overpriced securities raises questions about the information content of innovative corporate financing decisions

institutional markets financial marketing and financial innovation firms and institutions are monitored and controlled through a complex set of implicit and explicit contractual relations because of these agency theoretic relations institu tional behavior in financial markets is not a simple reflection of the preference structures of individuals institutional preferences give rise to a demand for new financial instru ments and innovations even when the returns on these instruments are spanned in the sense of complete pricing the innovations can be thought of as solving moral hazard problems an agency theoretic example serves to illustrate the demand supply and financial marketing of stripped securities in short institutions matter the past two decades have witnessed an explosion of financial innovations the changes are too varied and diffuse to permit an easy taxonomy but broadly they seem to fall into two classes first there are the new securities and their markets beginning with puts and calls we have moved on to euromarkets mortgage pass throughs and cmo s strips straps and swaps putable converti bles primes and scores and s p futures and all of the other instruments that inhibit the financial zoo second there are the dynamic trading strategies that make heavy use of the new instruments basket and program trading the asset pricing theories that now characterize different types of money management and the various incarnations of portfolio insurance have changed financial decision making as dramatically as the available array of instruments has changed along with these changes has come an enormous increase in the demand for the services of financial economists we are called upon not only to value the new instruments and the new strategies but to design them as well like engineers

finite maturity caps and floors on continuous flows models of interest rate caps and floors are typically based on discrete rates over finite horizons while existing real option models describe perpetual claims on the maximum of two continuous flows in this paper we produce formulae for finite maturity caps and floors that are contingent on continuous flows we present hedge ratios and discuss applications where a lognormally distributed flow variable is suitable for other situations where practitioners use proprietary models the formula presented is useful as a quick tractable and universal means for mapping quoted implied to prices and vice versa

optimal financial market integration and security design 1 we study 2 period pure exchange capital asset pricing model capm economies with incomplete financial markets and restricted participation we characterize the optimal financial market structure and efficient innovations consisting of both the introduction of new assets and the integration of segmented markets welfare gains from innovations are maximal when the endowments of affected agents are negatively correlated uncoordinated innovations lead to efficient market structures if all assets have identical participation structure or the markets being integrated trade identical assets however coordination failure in the introduction of new assets may result when assets have participation structures that overlap only partially

exclusion competition and regulation in the retail loan market abstract exclusion of borrowers from credit markets became a primary concern for regulators during the recovery from the recent recession the paper analyzes loan making institutions that set both interest rates and minimum credit requirements we propose analytical measures of the degree of borrower exclusion from receiving loans we analyze five market structures single lender regulated interest rate entry interest rate discrimination and highly competitive lenders interest rate regulation improves total welfare relative to a single lender market however entry of a second lender reduces exclusion and generates higher total welfare in the absence of fixed costs perfect and bertrand competition are optimal

pricing european currency options a comparison of the modified black scholes model and a random variance model we use the modified black scholes model and a random variance option pricing model to study prices of european currency options traded in geneva the options which cannot be exercised early include calls and puts on the dollar swiss franc exchange rate in the empirical analysis we examine the model fit and the biases with respect to the strike price time to maturity and volatility there is some evidence of mispricing and there are small gains available by trading with the random variance model

common factors and local factors implications for term structures and exchange rates this paper studies a multi factor two country term structure and exchange rate model when a diversification effect for an international bond portfolio is expected it shows that the diversification gain calls upon certain restrictions on the process of the stochastic discount factor in a factor structured economy existence of local factors is shown to be a necessary condition for the gains from investing in foreign bonds further the exchange rate risk premia are shown to be a function of the differentials of the risk premia of the factors in bond returns empirical results reveal the tendency for investors to respond sensitively to rare shocks which is shown to be a potential solution to the forward premium puzzle

options on the minimum or the maximum of two risky assets analysis and applications this paper provides analytical formulas for european put and call options on the minimum or the maximum of two risky assets the properties of these formulas are discussed in detail options on the minimum or the maximum of two risky assets are useful to price a wide variety of contingent claims of interest to financial economists applications discussed in this paper include the valuation of foreign currency debt option bonds compensation plans risk sharing contracts secured debt and growth opportunities involving mutually exclusive investments

noncooperative foundations of the area monotonic solution given a finite set of alternatives players alternate making offers player 1 offers some alternative that 2 can accept or veto if 2 accepts it is enforced and the game ends otherwise 2 makes a counteroffer among the remaining alternatives and so on if all alternatives are vetoed a disagreement alternative is enforced first we characterize the unique outcome of any subgame perfect equilibrium of this game then we show that this outcome converges to the area monotonic solution if the alternatives are uniformly distributed over the bargaining set and as the number of alternatives tends to infinity

hedging the risks from writing foreign currency options abstract this paper considers the ways in which banks and other financial institutions can hedge their risks when they write non exchange traded foreign currency options key factors affecting the performance of delta hedging are identified and hedging schemes involving the use of exchange traded options are analyzed the schemes are tested using both simulated data and data from trades on the philadelphia exchange between february 1983 and september 1984

arbitrage tests of the efficiency of the foreign currency options market in this paper the lower boundary excercise price and put call parity conditions for foreign currency options are subjected to empirical testing the tests are directed towards the examination of the hypothesis that the foreign currency option market is efficient the evidence in the ex post tests is inconsistent with this hypothesis since a large number of violations of theoretical conditions are found in the data

changes of numeraire for pricing futures forwards and options a change of numeraire argument is used to derive a general option parity or equivalence result relating american call and put prices and to obtain new expressions for futures and forward prices the general parity result unifies and extends a number of existing results the new futures and forward pricing formulas are often simpler to compute in multifactor models than existing alternatives we also extend previous work by deriving a general formula relating exchange options to ordinary call options a number of applications to diffusion models including stochastic volatility stochastic interest rate and stochastic dividend rate models and jump diffusion models are examined a self financing portfolio is called a numeraire if security prices measured in units of this portfolio admit an equivalent martingale measure the most commonly used numeraire is the reinvested short rate process the corresponding equivalent martingale measure is the risk neutral measure geman el karoui and rochet 1995 show that other numeraires can simplify many asset pricing problems in this article we build on their results and using the reinvested asset price as the numeraire unify and extend the literature on option parity or equivalence results relating american call and put prices for asset and futures options the same numeraire change is used to obtain new pricing formulas for futures and forwards that are often simpler to compute in multifactor models finally we use a numeraire change to simplify exchange option pricing extending a similar result in geman el karoui and rochet to dividend paying assets the change of numeraire method is most intuitive in the context of foreign currency derivative securities as discussed by grabbe 1983 an american call option to buy 1 dm with dollar price process s for k dollars is equivalent to an american put option to sell k dollars with dm price process k s for a strike price of 1 dm the dollar price of the call must therefore equal the product of the current exchange rate s0 and the dm price of the put the call price is computed using the dollar value of a u s i am grateful to kerry back the editor and costis skiadas for their many helpful suggestions thanks also to peter demarzo matt jackson naveen khanna david marshall robert mcdonald jim moser phyllis payette and an anonymous referee for their comments this article subsumes schroder 1992

proportional concessions and the leximin solution in this note we introduce a new axiom for bargaining solutions named proportional concession monotonicity pcm which imposes that no player benefits when all players collectively make proportional concessions with respect to their respective utopia values we reconsider the leximin solution imai 1983 and obtain an alternative characterization on the basis of pcm

international money and stock market contingent claims abstract we develop a unified approach with closed form solutions for pricing bonds stocks currencies and their derivatives the specification assumes a fundamental risk factor represented by a stochastic positive definite matrix following a wishart autoregressive war process by assuming a volatility in mean specification for the domestic stock returns and the relative changes of exchange rates and a domestic stochastic discount factor exponential affine with respect to the fundamental risk it is possible to derive closed form solutions for the term structures of interest rates and for the risk neutral probabilities while keeping the flexibility of the model in particular i the domestic and foreign term structures are jointly affine and correspond to wishart quadratic term structures which can ensure the positivity of interest rates ii in this framework where the stock price follows a model with stochastic volatility we obtain explicit or quasi explicit formulas for futures and forward contracts swaps and options this extends results by heston 1993 and ball and roma 1994

views on peak oil and its relation to climate change policy abstract definitions of fossil fuel reserves and resources and assessed stock data are reviewed and clarified semantics explain a large stake of conflict between advocate and critical voices on peak oil from a holistic sources sinks perspective limited carrying capacity of atmospheric sinks not absolute scarcity in oil resources will impose tight constraints on oil use eventually observed peaks in oil production in nearby years will result from politically imposed limits on carbon emissions and not be caused by physical lack of oil resources peak oil belief induces passive climate policy attitudes when suggesting carbon dioxide emissions will peak naturally linked to dwindling oil supplies active policies for reducing emissions and use of fossil fuels will also encompass higher energy end use prices revenues obtained from higher levies on oil use can support financing energy efficiency and renewable energy options but when oil producers charge the higher prices they can pump new oil for many decades postponing peak oil to occur while extending carbon lock in

currency option pricing with stochastic domestic and foreign interest rates this study develops a currency option pricing model under stochastic interest rates when interest rate parity holds and it is assumed that domestic and foreign bond prices have local variances that depend only on time we demonstrate how existing currency option models are simply derived from one framework empirical tests employing transactions option data reveal that a particularly simple form of the stochastic rate model is uniformly more accurate than a constant rate model for all boundaries and maturities tested

a moving boundary approach to american option pricing this paper describes a method to solve the free boundary problem that arises in the pricing of american options most numerical methods for american option pricing exploit the representation of the option price as the expected pay off under the risk neutral measure and calculate the price for a given time to expiration and stock price they do not solve the related free boundary problem explicitly the advantage of solving the free boundary problem is that it provides the entire price function as well as the optimal exercise boundary explicitly our approach which we term the moving boundary approach is based on using a boundary guess and the value associated with the guess to construct an improved boundary it is also shown that on iteration the sequence of boundaries converge monotonically to the optimal exercise boundary examples illustrating the convergence behavior as well as discussions providing insight into the method are also presented finally we compare runtimes and speeds with other methods that solve the free boundary problem and compute the optimal boundaries explicitly like the front fixing method penalty method method based on the integral representations and the method by brennan and schwartz 1977 the valuation of american put options journal of finance 32 2 449 462

boom and bust patterns in the adoption of financial innovations we develop a dynamic model of the adoption of financial innovations each period firms decide whether or not to adopt an innovation of uncertain value and the profitability of each period s adoptions reveals information about the innovation s value we show that characteristics of financial innovation waves cited by critics as evidence of irrational excess are in fact consistent with fully rational behavior we also show that social welfare is enhanced when more firms adopt innovations of questionable value and that financial intermediaries base an incentive to encourage such adoption article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

the pricing of dollar denominated yen dm warrants abstract this paper investigates the pricing of dollar denominated cross currency warrants options traded in us markets in a black scholes setting we obtain closed form option pricing formulas for european warrants we describe the intuition behind the differences in the properties of these securities versus standard foreign currency options concentrating on parameter sensitivity as well as hedging aspects we show that us cross currency warrants can be hedged using three underlying assets although the fundamental pde involves only one asset this analytical framework is applied to observed prices for at t s nyse traded us yen dm cross currency warrant we examine and attempt to explain the deviations between model and observed prices uncovered by the empirical work we find evidence of misspecification in standard currency option pricing models jel f31

pricing foreign currency options under stochastic interest rates abstract in this paper we build a general framework to price contingent claims on foreign currencies using the heath et al 1987 model of the term structure closed form solutions are obtained for european options on currencies and currency futures assuming that the volatility functions determining the term structure are deterministic as such this paper provides an example of a bond price process for both the domestic and foreign economies consistent with grabbe s 1983 formulation of the same problem

exchange rate intervention with options abstract we consider the problem of a central bank that has exchange rate goals in a partial equilibrium setting we compare direct intervention through sale purchase of reserves in the currency market with an alternative strategy of intervention with options the investment bank the central bank deals with will have to hedge its position and therefore buy or sell the underlying security the foreign currency and bonds intervention through options seems to perform better but the value of the cross elasticity exchange rate interest rate is crucial we provide some grounds for the construction of a full equilibrium model

equilibrium valuation of foreign exchange claims this article studies the equilibrium valuation of foreign exchange contingent claims within a continuous time lucas 1982 two country model exchange rates interest rates and in particular factor risk prices are all endogenously and jointly determined this guarantees the internal consistency of these price processes with a general equilibrium in the same model closed form valuation formulas are presented for currency options and currency futures options common to these formulas is that stochastic volatility and stochastic interest rates are admitted hedge ratios and other comparative statics are also provided analytically it is shown that most existing currency option models are included as special cases this article studies the equilibrium valuation and hedging of foreign exchange contingent claims the framework for analysis is the continuous time counterpart of the well known two country monetary model of lucas 1982 1 that is we use the modeling structure of lucas 1982 and adopt his representativeagent perfect pooling equilibrium notion rather than extending the lucas setup to a cox ingersoll and ross 1985a henceforth cir production economy as is done in nielsen and saa requejo 1993 for our purpose the lucas framework offers the desired simplicity and tractability we assume a stochastic structure for the international economy such that the resulting nominal interest rates and exchange rate dynamics exhibit similar empirically plausible features as the corresponding ones in nielsen and saa requejo 1993 for example the endogenous interest rates are positively correlated across national borders campbell and clarida 1987 and ilmanen 1995 as a predictor of future spot exchange rates the equilibrium forward exchange rate is biased in a direction consistent with the forward premium puzzle

plumbing the depths utilizing o g reserve profiles to develop forward looking risk assessments for exploration and production activities abstract the deepwater horizon accident may have shaken the sustainability ratings and indices credibility but it also reinforced their importance the objective of this article is to contribute to the improvement of corporate sustainability valuations by investigating if reserves profiles can affect the environmental risk exposure of an oil gas og 2 water is more of an issue with companies with higher bitumen and natural gas reserves and 3 there is significant regional bias in the reporting of the environmental risk factors these findings have broad implications for the financial industry governments investors and lenders alike

stability and collective rationality the principle of pairwise comparisons is a well established one in social choice theory the idea of collective rationality that social decisions be made consistently with the maximization of some ordering of the alternatives is the most familiar application of this principle and indeed is a defining property of the social welfare functions of bergson 1938 and samuelson 1947 and of arrow 1951 as is well known the idea of collective rationality involves comparing every social state to every other social state in terms of the welfare assigned by those states to a given group of individuals and declaring a social state to be fair or good if it is good when considering all such pairwise comparisons with other social states alternatively one could imagine a social decision process based on comparing every individual to every other individual in terms of the welfare assigned to those individuals by a given social state and declaring a social state to be good or fair if it is fair when considering all such pairwise comparisons of individuals a social decision process in this spirit has been suggested by harsanyi 1959

the internet and financial market structure financial markets are markets for information as such they are directly influenced by advances in information dissemination storage and processing associated with the commercial development of the internet on the other hand given the long standing centrality of information in financial markets the consequences of the internet for financial markets can be understood as evolutionary rather than revolutionary this article provides a framework for understanding how the historical interplay between information technology and human capital has influenced financial market structure in doing so it sheds light on the recent reorganization of financial markets the daring reader might infer implications for reorganization of product markets where the impact of the internet is more abrupt copyright 2001 oxford university press

financial innovation the last twenty years and the next the word revolution is entirely appropriate for describing the changes in financial institu tions and instruments that have occurred in the past twenty years the major impulses to successful financial innovations have come from regulations and taxes the outlook for the future is for a slowing down of the rate of financial innovation but much growth and improvement are still in prospect

a model for designing callable bonds and its solution using tabu search abstract we formulate the problem of designing callable bonds as a non linear global optimization problem the data of the model are obtained from simulations of holding period returns of a given bond design which are used to compute a certainty equivalent return viz some target assets the design specifications of the callable bond are then adjusted so that the certainty equivalent return is maximized the resulting problem is multi modal and a tabu search procedure implemented on a distributed network of workstations is used to optimize the bond design the model is compared with the classical portfolio immunization model and the tabu search solution technique is compared with simulated annealing for solving the global optimization program it is shown that the global optimization model yields higher returns than portfolio immunization it is also shown that tabu search is computationally more efficient than simulated annealing in solving the model and it produces better solutions

design and marketing of financial products marketing costs are introduced into the security design environment outlined in allen and gale 1988 it is shown that splitting the firm s cash flow between products enhances their investor appeal and reduces marketing costs we also explain how the extremal product design in allen and gale is thereby avoided and how in simple cases debt equity or warrants can be optimal furthermore we illustrate in general terms how the optimal solution employs portfolios of option type products and we give an example of two optimal products that share profits in seven of eight states article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

nash demand game and the kalai smorodinsky solution we introduce two new variations on the nash demand game in one as in all past variants of nash demand games the nash bargaining solution is the equilibrium outcome the other demand game allows for probabilistic continuation in cases of infeasible joint demands specifically with probability 1 p the game terminates and the players receive their disagreement payoffs but with probability p the game continues to a second stage in which one of the two incompatible demands is randomly selected and implemented surprisingly the kalai smorodinsky solution is always the outcome of the most robust equilibrium of this game moreover ranking other solution concepts is impossible

valuation of libor contingent fx options abstract a libor contingent fx option represents a currency option whose payoff occurs only if a prespecified interest rate at maturity is either above or below a prespecified level the product permits investors to express an exchange rate view that is based on or coupled with an interest rate view and is less expensive than a plain vanilla fx option this paper provides analytic solutions for pricing several types of libor contingent fx options under certain specifications of the initial domestic forward curve foreign forward curve and the exchange rate simulations are conducted to illustrate certain properties of these products

forecasting natural gas supply in china production peak and import trends china s natural gas consumption has increased rapidly in recent years making china a net gas importer as a nonrenewable energy the gas resource is exhaustible based on the forecast of this article china s gas production peak is likely to approach in 2022 however china is currently in the industrialization and urbanization stage and its natural gas consumption will persistently increase with china s gas production peak china will have to face a massive expansion in gas imports as the largest developing country china s massive imports of gas will have an effect on the international gas market in addition as china s natural gas price is still controlled by the government and has remained at a low level the massive imports of higher priced gas will exert great pressure on china s gas price reform

the choquet bargaining solutions abstract we axiomatically investigate the problem of rationalizing bargaining solutions by social welfare functions that are linear in every rank ordered subset of r n such functions the so called choquet integrals have been widely used in the theories of collective and individual choice we refer to bargaining solutions that can be rationalized by choquet integrals as choquet bargaining solutions our main result is a complete characterization of choquet bargaining solutions as a corollary of our main result we also obtain a characterization of the generalized gini bargaining solutions introduced by blackorby et al 1994 econometrica 62 1161 1178 journal of economic literature classification numbers d71 c78

reference functions and balanced concessions in bargaining in bargaining agents expect their concessions to be reciprocated using the reference function concept of thomson 1981 this paper constructs a class of solutions the outcomes of which lead to balanced concessions by agents as prescribed by the reference function adopted the kalai smorodinsky solution arises as a special case another solution in this class which depends on the entire feasible set is generated by using the centre of gravity as the reference function

valuation of american options on foreign currency abstract pricing models for american call and put options on foreign currency are derived herein these models are used to investigate the efficiency of the market for foreign currency options the evidence presented here indicates that market prices for these options deviate substantially from their corresponding model prices in addition it is shown that a hedging strategy executed at transaction prices can be used to translate an observed deviation of market from model prices into positive excess profits however these profits are eliminated if the strategy is executed at bid and offer prices

the performance of alternative valuation models in the otc currency options market abstract we compare option valuation models based on regime switching garch and jump diffusion processes to a standard smile model in which black and scholes 1973 implied volatilities are allowed to vary across strike prices the regime switching garch and jump diffusion models provide significant improvement over a fixed smile model in fitting gbp and jpy option prices both in sample and out of sample the jump diffusion model achieves the tightest fit a time varying smile model however provides hedging performance that is comparable to the other models for the gbp options this result suggests that standard option valuation techniques may provide a reasonable basis for trading and hedging strategies

robustness of intermediate agreements and bargaining solutions abstract most real life bargaining is resolved gradually during this process parties reach intermediate agreements these intermediate agreements serve as disagreement points in subsequent rounds we identify robustness criteria which are satisfied by three prominent bargaining solutions the nash proportional and as a special case to the egalitarian solution and discrete raiffa solutions we show that the robustness of intermediate agreements plus additional well known and plausible axioms provide novel axiomatizations of the above mentioned solutions hence we provide a unified framework for comparing these solutions bargaining theories

currency option pricing with mean reversion and uncovered interest parity a revision of the garman kohlhagen model abstract we consider a model for the pricing of currency options where the logarithm of the exchange rate exhibits mean reversion i e follows the omstein uhlenbeck process we mention reasons why exchange rates could exhibit mean reversion the domestic and foreign short interest rates are related to the logarithm of the exchange rate through uncovered interest parity under these assumptions we derive formulas for the value of a european currency option from the point of view of both domestic and foreign investors we also derive formulas for options on forward and futures contracts we compare option values computed by means of the garman kohlhagen model with corresponding results from our model it appears that our model cannot explain all instances of mispricing of currency options by the garman kohlhagen model which have been reported by previous authors the main virtue of our paper however is that we derive a simple model which incorporates clear theoretical relationship between the exchange rate and the domestic and foreign interest rates

financial innovation the bright and the dark sides based on data from 32 countries over the period 1996 2010 this paper is the first to assess the relationship between financial innovation on the one hand and bank growth and fragility as well as economic growth on the other hand we find that different measures of financial innovation capturing both a broad concept and specific innovations are associated with faster bank growth but also higher bank fragility and worse bank performance during the recent crisis these effects are stronger in countries with larger securities markets and more restrictive regulatory frameworks in spite of these seemingly ambiguous findings our evidence points to a positive net effect of financial innovation on economic growth financial innovation is associated with higher growth in countries and industries with better growth opportunities

misspecification and the pricing and hedging of long term foreign currency options abstract this study examines the effects of stochastic volatility upon the pricing and hedging of long term foreign currency options the traditional method of pricing such options uses a constant volatility option model with an implicit volatility derived from a short term traded option we show that the traditional method leads to small pricing errors for short and medium term options but does a poor job in pricing long term options the traditional method also does a poor job for all maturities in determining the derivatives of the option s value with respect to the exchange rate delta and the volatility vega the errors in calculating these derivatives which are used in forming the replicating portfolio lead to large and costly errors in error hedging

an expository note on the valuation of foreign exchange options abstract this note describes the application of the binomial model to the valuation of foreign exchange options and reports simulated pricesof american as well as europen call and put options we find significant deviations of simulated call prices from those reported elsewhere this casts some doubt on empirical findings that american calls have significant pricing errors

tests of an american option pricing model on the foreign currency options market this paper tests the ability of the american option pricing model proposed by parkinson 18 or mason 14 to explain the pricing of the foreign currency options traded on the philadelphia stock exchange from february 28 1983 to march 26 1985 we find that the model underprices out of the money options relative to at the money and in the money options this relative underpricing is driven by an underpricing of out of the money call options of short maturity in addition the degree of relative mispricing for most categories of options is shown to be a decreasing function of the time to maturity of the options longer maturity options appear to trade at similar levels of implied volatility whether they are in at or out of the money most of these biases appear consistent with the fact that the underlying spot currency rate follows a mixed jump diffusion process as described in 17

the pricing of call and put options on foreign exchange this paper derives pricing equations for european puts and calls on foreign exchange the call and put pricing formulas are unlike the black scholes equations for stock options in that there are two relevant interest rates interest rates are stochastic and boundary constraints differ in addition it is shown that both american call and put options have values larger than their european counterparts

pricing contingent claims under interest rate and asset price risk this paper presents a general framework for pricing contingent claims under interest rate and asset price uncertainty the framework extends ho and lee s 1986 valuation framework by allowing not only future interest rates but also future asset prices to depend on the current term structure of interest rates the approach is shown to provide risk neutral valuation relationships that are consistent with the initial term structure of interest rates and can be applied to valuation of a broad class of assets including stock options convertible bonds and junk bonds

the pricing of options with default risk this paper considers the pricing of options with default risk the comparative statics of such options can differ from those of ordinary options and early exercise of such american call options can be optimal several examples of options with default risk are considered traditionally it has been assumed that options have no default risk such an assumption is reasonable when one studies options traded on an organized exchange in the u s default on such options would require as cox and rubinstein 5 put it a very sudden and strong movement in stock prices one considerably more extreme than any on record p 71 however many options and financial assets containing option like payoffs are sold by firms that have limited assets for such options default is often a possibility that must be taken seriously in this paper we study how options subject to default risk which we hereinafter call vulnerable options are priced it turns out that many of the well established results of the option pricing literature see e g smith 12 and references therein do not hold for vulnerable options in particular the value of a vulnerable european option can fall with time to maturity with the interest rate and with the variance of the underlying asset furthermore it may pay to exercise early a vulnerable american option on a non dividend paying asset

valuation and martingale properties of shadow prices an exposition abstract concepts of asset valuation based on the martingale properties of shadow or marginal utility prices in continuous time infinite horizon stochastic models of optimal saving and portfolio choice are reviewed and compared with their antecedents in static or deterministic economic theory applications of shadow pricing to valuation are described including a new derivation of the black scholes formula and a generalised net present value formula for valuing an indivisible project yielding a random income some new results are presented concerning i the characterisation of an optimum in a model of saving with an exogenous random income and ii the use of random time transforms to replace local by true martingales in the martingale and transversality conditions for optimal saving and portfolio choice

the effects of domestic and foreign yield curves on the value of currency american call options this paper examines the sensitivity of the values of foreign currency american call options to the domestic and foreign term structures of interest rates pricing performances of currency option models are compared with and without the term structure effects it is shown that there exist significant pricing biases if flat yield curves are assumed and that different shapes of domestic and foreign yield curves can have major impacts on currency option prices

the end of cheap oil current status and prospects abstract this paper analyses the factors impacting the price of crude oil in order to examine the likely evolution of the oil market and attempts to answer the question whether cheap oil is already a thing of the past based on data made publicly available mostly by the major oil companies it examines the effects of demand and supply the evolution of world oil reserves the trends in new discoveries of new oilfields the evolution of world gross domestic product gdp and the depletion of oil resources the analysis concludes that the world peak in conventional oil production the point beyond which oil production will irreversibly start declining is approaching and will be reached even according to the most optimistic scenarios before 2040 and quite possibly much sooner if the appropriate solutions for substituting crude oil and for conserving the use of energy are not implemented in time then the current upward trend in oil prices is bound to continue

dollar jump fears 1984 1992 distributional abnormalities implicit in currency futures options abstract deutsche mark and yen futures options over 1984 1992 and 1986 1992 respectively are examined for deviations from the lognormal assumption underlying standard option pricing models two methods are used an atheoretic skewness premium and daily estimates of moments using a model for pricing american foreign currency futures options under systematic exchange rate jump risk substantial variation over time is found in all moments including implicit skewness and kurtosis the implicit abnormalities predict future abnormalities in log differenced dm futures prices but not yen the peso problem implications do not explain standard rejections of uncovered interest parity

client discretion switching costs and financial innovation we analyze the incentives of investment banks to develop innovative products we show that client characteristics and market structure affect these incentives significantly investment banks with larger market shares have greater incentives to innovate and smaller banks are likely to share their innovations with the largest bank innovation incentives increase in volatile environments and regulatory scrutiny actually encourages loophole exploitation activity our predictions are consistent with stylized facts and the analysis has broad testable implications for innovative activity in other markets similarly characterized by a lack of comprehensive protection for intellectual property rights for example the software industry article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

on the pricing of european and american foreign currency call options abstract this study uses cox ross analysis and dynamic programming techniques to price foreign currency call options we show that under certain conditions the american call price will exceed its european counterpart while under other conditions the two prices will be identical we find that the american premium is a complex function of the degree to which an option is in or out of the money and that this premium is greatest when an option is near in or out we present empirical evidence which shows that the american model significantly improves upon a european model however significant pricing errors associated with the american model remain

discrete time valuation of american options with stochastic interest rates we develop an arbitrage free discrete time model to price american style claims for which domestic term structure risk foreign term structure risk and currency risk are important this model combines a discrete version of the heath jarrow and morton 1992 term structure model with the binomial model of cox ross and rubinstein 1979 it converges weakly to the continuous time models in amin and jarrow 1991 1992 the general model is path dependent and can be implemented with arbitrary volatility functions to value claims with maturity up to five years the model is illustrated with applications to long dated american currency warrants and a cross rate swap from the quanto class article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

siegel s paradox and the pricing of currency options abstract it is an important property of a currency option that its value does not depend on whose point of view is taken that of the domestic or foreign investor option values obtained from the garman kohlhagen model do satisfy this property the merton jump diffusion model has been proposed as a more realistic currency option model to eliminate pricing biases inherent in the garman kohlhagen model the jump diffusion model assumes that the jump risk is non priced ie can be diversified away if both the domestic and foreign investor make that assumption then the jump diffusion model produces option values which are different for the two investors thus violating the law of one price this is an instance of the siegel paradox the extent to which computed option values may differ between the two investors is indicated through numerical examples

collateral motivated financial innovation collateral frictions have a profound effect on our economic landscape ranging from the design of financial securities laws and institutions to various rules and regulations we analyze a model with disagreement where securities and collateral requirements are endogenous it shows that the security that isolates the variable with disagreement is optimal in the sense that alternative securities cannot generate any trading in an economy with n states investors may introduce more than n securities and markets are still incomplete the model has several novel predictions on the behavior of basis the spread between the prices of an asset and its replicating portfolio

dynamic relationship of oil price shocks and country risks abstract this study investigates the dynamic relationship between oil price shocks and country risks using a structural var framework for a sample of both net oil exporting and net oil importing countries over the period january 1994 december 2014 the results reveal that country risk is significantly affected by oil price shocks but the impacts are different unanticipated positive oil price shocks trigger a reduction addition in country risk for net oil exporting country net oil importing countries as to the responses of oil prices to country risk shock evidence show that country risk shocks have a delayed significantly positive impacts on oil price for oil exporting country with respect to the effects of subcomponents of country risk we find evidence that economic and political risk have a significant impact on supply side shocks in net oil exporting countries like canada while economic and political risk have a significant effect on supply side shocks and oil specific demand shocks in net oil importing countries like the us these results are particularly important to policy makers and government

designing portfolios of financial products via integrated simulation and optimization models we analyze the problem of debt issuance through the sale of innovative financial products the problem is broken down to questions of designing the financial products specifying the debt structure with the amount issued in each product and determining an optimal level of financial leverage we formulate a hierarchical optimization model to integrate these three issues and provide constructive answers input data for the models are obtained from monte carlo simulation procedures that generate scenarios of holding period returns of the designed products the hierarchical optimization model is specialized for the problem of issuing a portfolio of callable bonds to fund mortgage assets the upper level optimization program is multimodal and a tabu search procedure is developed for its solution empirical results illustrate the efficacy of the developed models in designing the appropriate structure of the callable bonds and making optimal allocations of equity and debt among the designed products computational results with the implementation of tabu search on both serial and parallel computers are also presented

producing derivative assets with forward contracts this paper shows how a derivative security can be duplicated by a forward strategy and hence priced by arbitrage in terms ofthe forward price