This paper analyzes a pentanomial lattice model for option pricing that incorporates skewness and kurtosis of the underlying asset. The lattice is constructed using a moment matching procedure, and explicit positivity conditions for branch probabilities are provided in terms of skewness and...

Building blocks -- It's dilemma -- Stochastic differential equations -- The factor model approach to arbitrage pricing -- Constructing a factor pricing framework -- Equity derivatives -- Interest and credit derivatives -- Hedging -- Computation of solutions -- The road to risk neutrality -- Index

Although much research has been devoted to portfolio optimization, starting with the seminal work of Markowitz (1952), relatively little has been focused on corporate bond portfolio optimization, particularly when there are multiple bonds in which to invest. In this paper, we propose a...

The classical finance problem of dynamically hedging a short option in a discrete time environment with transaction costs has generally been approached through either a sub-optimal analytical solution with an instantaneous horizon or through the formulation of a long term horizon dynamic program...