This paper assumes that the underlying asset prices are lognormally distributed, and derives necessary and sufficient conditions for the valuation of options using a Blackâ€Scholes type methodology. It is shown that the price of a futuresâ€style, markedâ€toâ€market option is given by...

Although there has been much attention in recent years on the effects of additive background risks, the same is not true for its multiplicative counterpart. We consider random wealth of the multiplicative form x\~y\~, where x\~ and y\~ are statistically independent random variables. We assume...

We examine the effects of background risks on optimal portfolio choice. Examples of background risks include uncertain labor income, uncertainty about the terminal value of fixed assets such as housing and uncertainty about future tax liabilities. While some of these risks are additive and have...

In a recent paper in this Journal, Stiglitz purports to show that leverage may affect the value of the firm in competitive capital markets if the possibility of bankruptcy and the differential expectations between stock holders and bond holders are admitted. However, Stiglitz argues that...