In this paper, we propose a general method for pricing and hedging non-standard American options. The proposed method applies to any kind of American-style contract for which the payoff function has a Markovian representation in the state space. Specifically, we obtain an analytic solution for...

In this paper, we propose an alternative approach for pricing and hedging Americanbarrier options. Specifically, we obtain an analytic representation for the value and hedge parameters of barrier options, using the decomposition technique of separating the European option value from the early...

This paper investigates the relation between returns on stock indices and their corresponding futures contracts in order to evaluate potential explanations for the pervasive yet anomalous evidence of positive, short-horizon portfolio autocorrelations. Using a simple theoretical framework, we...

This paper provides an analytical solution to the problem of how an institution might optimally manage the market risk of a given exposure, under the assumption that the institution wishes to minimize its Value at Risk (VaR) using options. The solution specifies the VaR-minimizing level of...

In modern finance, the value of an active investment strategy is measured by comparingits performance against the benchmark of passively holding the market portfolio and the riskless asset. We wish to evaluate the marginal contribution of a theoretical derivatives pricing model in the same way,...

Applying modern option valuation theory requires the user to forecast the volatility of the underlying asset over the remaining life of the option, a formidable estimation problem for long maturity instruments. The standard statistical procedures using historical data are based on assumptions of...

Stock index futures and program trading are among the most important financial market innovations of the 1980s. This chapter surveys the literature and provides an overview of the somewhat controversial area of index arbitrage. We begin with a description of how index futures work, how they...

There has been much discussion of risks tied to trading in derivatives, with some well-informed objective observers arguing that derivatives risks are not significantly greater or different from those associated with traditional financial instruments. Financial risks are often broken down into...

Value at Risk and similar measures of financial risk exposure require predicting the tail of an asset returns distribution. Assuming a specific form, such as the normal, for the distribution, the standard deviation (and possibly other parameters) are estimated from recent historical data and the...

The quot;leverage effectquot; refers to the well-established relationship between stock returns and both implied and realized volatility: volatility increases when the stock price falls. A standard explanation ties the phenomenon to the effect a change in market valuation of a firm's equity has...