This paper values interest rate options using an improved parametric pricing kernel in the Merton (1973) intertemporal capital asset pricing model framework. The pricing kernel is driven by the real interest rate, the Jensen's alpha, and the market volatility. Parameters in the pricing kernel...

The current exchange rate policy is being argued about its vulnerability, especially at presence of an adverse external situation. In this context, it is important to check how market faces the credibility of such policy. This paper provides a way of measuring this credibility, using market's...

Optimal portfolios of variance swaps are constructed taking account of both autocorrelation and cross asset dependencies. Market prices of variance swaps are extracted from option surface calibrations. The methods developed permit simulation of cash flows to arbitrary portfolios of variance...

The theory of pricing to acceptability developed for incomplete markets by Cherny and Madan (2009b) is applied to marking ones own default risk. It is observed in agreement with Heckman (2004), that assets and liabilities are not to be priced under fair value accounting principles at the same...

When firms access unbounded liability exposures and are granted limited liability, then an all equity firm holds a call option, whereby it receives a free option to put losses back to the taxpayers. We call this option the taxpayer put, where the strike is the negative of the level of reserve...

Realized variance option and options on quadratic variation normalized to unit expectation are analyzed for the property of monotonicity in maturity for call options at a fixed strike. When this condition holds the risk neutral densities are said to be increasing in the convex order. For Lévy...