The purpose of this paper is to develop certain relatively recent mathematical discoveries known generally as stochastic calculus, or more specifically as Ito's Calculus and to also illustrate their application in the pricing of options. The mathematical methods of stochastic calculus are...

In this paper, we discuss the application of precipitation contracts by describing several structured precipitation derivatives transactions. We propose, calibrate, and compare three precipitation models: A Gamma distribution, a mixture of exponentials, and kernel density. Based on the data for...

This paper empirically examines the proxy, volatility-restriction (VR) and maximum likelihood (ML) approaches to implementing structural corporate bond pricing models, and documents that ML estimation is the best among the three implementation methods. Empirical studies using either the proxy...

This study examines short horizon currency futures returns. Expectations hypothesis or risk neutrality assumes an efficient market with no risk premium, and therefore no predictor for futures returns. Using the British, German, Swiss, Japanese, and Canadian currencies as well as pooled currency...

The question of pricing and hedging a given contingent claim has a unique solution in a complete market framework. When some incompleteness is introduced, the problem becomes however more difficult. Several approaches have been adopted in the literature to provide a satisfactory answer to this...

Merton-type models of pricing corporate bonds based on relatively simple default processes cannot generate credit spreads which replicate empirically observed spreads. This paper presents an analytical valuation model of corporate discount bond prices to address this problem. The main feature of...

We develop a rigorous two-currency pricing framework that can be constructed under either a domestic or a foreign currency numeraire. While plain vanilla interest rate derivative prices are recovered by design, exotic cross-currency interest rate products can be priced by determining...

Using an extensive cross-section of US corporate CDS this paper offers an economic understanding of implied loss given default (LGD) and jumps in default risk. We formulate and underpin empirical stylized facts about CDS spreads, which are then reproduced in our affine intensity-based...

Volatilities implied in options significantly stray upward from realized volatilities. Trading prices in markets are higher than theoretical prices calculated by the BS model. This paper aims to explain the implied volatility premium from the perspective of investors' loss-aversion. In practice...

Even if the name futures indicates a simple instrument, bond futures are complex. Several special features are embedded in the instrument. In particular the future is not written on one specific bond but on a basket of bonds, from which the short side can deliver the cheapest. This paper focuses...