This article provides a new methodology for pricing and hedging derivative securities involving credit risk. Two types of credit risks are considered. The first is where the asset underlying the derivative security may default. The second is where the writer of the derivative security may...

This paper studies the impact that margin requirements have on both the existence of arbitrage opportunities and the valuation of ca ll options. In the context of the Black-Scholes economy, margin restr ictions are shown to exclude continuous-trading arbitrage opportuniti es, and with two...

This paper investigates the reported relative mispricing of primes and scores to the underlying stock. Given transaction costs, the authors establish arbitrage-based bounds on prime and score prices. They then develop a new nonparametric statistical technique to test whether prime and score...

This paper investigates the relation between ex-dividend stock price behavior and arbitrage oppor tunities. In a continuous trading, frictionless economy, the authors demonstrate that it is possible for the ex-dividend stock price drop to differ from the dividend, and still short-term traders...

The downside risk in a leveraged stock position can be eliminated by using stop-loss orders. The upside potential of such a position can be captured using contingent buy orders. The terminal payoff to this stop-loss start-gain strategy is identical to that of a call option, but the strategy...