In this paper we develop a new method to value American stock options with stochastic interest rates. We construct a binomial tree for the stock price divided by the price of the zero coupon bond that matures at the maturity date of the option. In fact, we construct a tree for the so-called...

In this paper we consider the problem of hedging contingent claims on a stock under transaction costs and stochastic volatility. Extensive research has clearly demonstrated that the volatility of most stocks is not constant over time. As small changes of the volatility can have a major impact on...

In this paper we study the impact of earnings announcements on trading volume, open interest and spreads in the stock option market. We find that option volume is higher around announcement days, even if we correct for stock volume and the expected future volatility of stock returns. Results in...

Some of the most recent empirical studies on interest rate derivatives have found humped shapes in the volatility structure of interest rates. Accordingly, Mercurio and Moraleda (1996) have modeled interest rate dynamics in a way that allows for such a shape in the volatility and is analytically...

This article develops a new trinomial tree model for barrier options. It is well-known that for barrier options, the positions of nodes in the tree with respect to the barrier value are critical. We use a time-dependent shift to position the tree optimally with respect to the barrier. The model...

There exist a number of approximation methods for the price of average rate options, when the underlying asset is a currency or equity. Realistic pricing models for average interest rate caps based on interbank offered rates have not yet been published. In this paper, we propose to adapt the...

It is common to find index funds being marketed with a protective floor. It gives investors the upside potential of the equity market, while protecting them from possible losses. In this paper, we describe a new type of protective floor, in which the floor level is not set at inception of the...

Index-futures arbitrageurs enter into the market only if the deviation from the arbitrage relation is large enough to compensate for transaction costs and associated interest-rate and dividend risks. Using a threshold autoregression model for the mispricing error, we estimate the band around the...

We study the implied volatility behavior of European Options Exchange call option prices around scheduled news announcement days of the underlying stock. Implied volatilities significantly increase during the pre-event period and reach a maximum at the eve of the news announcement. After the...

We value rating-triggered step-up bonds with three methods: (i) the Jarrow, Lando andTurnbull (1997, JLT) framework, (ii) a similar framework using historical probabilities and(iii) as plain vanilla bonds. We find that the market seems to value single step-up bondsaccording to the JLT model,...