We formulate European and American versions of a number of two-factor multiasset options (such as exchange options, quanto options and basket options) in a path integral framework via use of the Chapman-Kolmogorov equation. We show how to evaluate such options using Fourier-Hermite expansions...

The existence of risk premium is thought to be the reason why forward exchange rate is not an unbiased predictor of future spot exchange rate. In this paper we review two methodologies for inferring this unobserved risk premium based upon signal extraction mechanism. One approach relies on the...

In this paper, we develop a model of business cycle fluctuations between two interacting open economies within the disequilibrium or non-market clearing paradigm. We analyze the main feedback mechanisms (Keynes, Mundell, Rose and Dornbusch) driving the dynamics and the conflict between their...

A discrete time model of a financial market is developed, in which heterogeneous interacting groups of agents allocate their wealth between two risky assets and a riskless asset. In each period each group formulates its demand for the risky assets and the risk-free asset according to myopic...

This paper examines the pricing of interest rate derivatives when the interest rate dynamics experience infrequent jump shocks modelled as a Poisson process. The pricing framework adapted was developed by Chiarella and Nikitopoulos to provide an extension of the Heath, Jarrow and Morton model to...

Hedging interest rate exposures using interest rate futures contracts requires some knowledge of the volatility function of the interest rates. Use of historical data as well as interest rate options like caps and swaptions to estimate this volatility function have been proposed in the...

We consider the American option pricing problem in the case where the underlying asset follows a jump-diffusion process. We apply the method of Jamshidian to transform the problem of solving a homogeneous integro-partial differential equation (IPDE) on a region restricted by the early exercise...

We reconsider the derivation of the traditional capital asset pricing model (CAPM) in the discrete time setting for a portfolio of one riskless asset and many risky assets. In contrast to the standard setting, it is assumed that agents are heterogeneous in their conditional means and covariances...

Margrabe provides a pricing formula for an exchange option where the distributions of both stock prices are log-normal with correlated components. Merton has provided a formula for the price of a European call option on a single stock where the stock price process contains a compound Poisson...