The construction of martingales with given marginal distributions at given times is a recurrent problem in financial mathematics. From a theoretical point of view, this problem is well-known as necessary and sufficient conditions for the existence of such martingales have been described....

The theory of two price markets of Cherny and Madan (2010) yields closed forms for bid and ask prices. Defining profits as the difference between the mid quote and the risk neutral expectation and capital as difference between the ask and the bid price one obtains precise expressions for these...

We test a theory that provides a simple and robust linkage between the market prices of credit default swaps (CDS) and far out-of-the-money equity American put options on the same reference company. The linkage is established under a general class of stock price dynamics. We assume that the...

The most widely used option pricing model is the Black-Scholes model.We motivate an alternative option pricing model called the Variance Gamma (VG) model and demonstrate its implementation in the Bloomberg system

We propose a direct and robust method for quantifying the variance risk premium on financial assets. We theoretically and numerically show that the risk-neutral expected value of the return variance, also known as the variance swap rate, is well approximated by the value of a particular...

We propose a dynamically consistent framework that allows joint valuation and estimation of stock options and credit default swaps written on the same reference company. We model default as controlled by a Poisson process with a stochastic default arrival rate. When default occurs, the stock...

Using sovereign CDS spreads and currency option data for Mexico and Brazil, we document that CDS spreads covary with both the currency option implied volatility and the slope of the implied volatility curve in moneyness. We propose a joint valuation framework, in which currency return variance...

We document the behavior of over-the-counter currency option prices across moneyness, maturity, and calendar time on two of the most actively traded currency pairs over the past eight years. We find that on any given date, the conditional risk-neutral distribution of currency returns can show...