The optimal portfolio of a utility-maximizing investor trading in the S&P 500 index and cash, subject to proportional transaction costs, becomes stochastically dominated when overlaid with a zero-net-cost portfolio of S&P 500 options bought at their ask and written at their bid price in most...

This paper improves continuous-time variance swap approximation formulas to derive exact returns on benchmark VIX option portfolios. The new methodology preserves the variance swap interpretation that decomposes returns into realized variance and option implied-variance.We apply this new...

This paper provides an introduction to derivative products and markets. It also reviews the basic conceptual framework for asset pricing. Derivative products and markets are defined and insight into asset pricing is provided. This is based on assumptions of no-arbitrage and frictionless markets....

We propose a counter-cyclical initial margin model for option portfolios. Our model explores the intrinsic netting within a given portfolio of European options and outputs a constant upper bound of the maximum possible loss. This feature would allow option clearinghouses and regulators to gauge...

I derive closed-form expressions for the value of American call and put options (on an asset with continuous yield) using the Feynman-Kac formula, modelling the size of early exercise premium as a function of the strike, dividend yield and time to maturity. Strategies involving European options...