Most existing hedging approaches are based on neutralizing risk exposures defined under a pre-specified model. This paper proposes a new, simple, and robust hedging approach based on the affinity of the derivative contracts. As a result, the strategy does not depend on assumptions on the...

Underlying each stock trades hundreds of options at different strike prices and maturities. The order flow from these option transactions reveals important information about the underlying stock price movement and its volatility variation. How to aggregate the trade information of different...

We test a theory that provides a simple and robust linkage between the market prices of credit default swaps (CDS) and far out-of-the-money equity American put options on the same reference company. The linkage is established under a general class of stock price dynamics. We assume that the...

Prices of currency options commonly differ from the Black-Scholes formula along two dimensions: implied volatilities vary by strike price (volatility smiles) and maturity (implied volatility of at-the-money options increases, on average, with maturity). We account for both using Gram-Charlier...

The Federal Reserve adjusts the target federal funds rate discretely, causing discontinuity in short-term interest rates. However, unlike random Poisson jumps, these adjustments are well anticipated by the market. Within the affine term structure framework, we incorporate an anticipated jump...

With increasing appreciation of the fact that stock return variance is stochastic and variance risk is heavily priced, the industry has created a series of variance derivative products to span variance risk. The variance swap contract is the most actively traded of these products. It pays at...

We study the risk dynamics and pricing in international economies through a joint analysis of the time-series returns and option prices on three equity indexes underlying three economies: the Samp;P 500 Index of the United States, the FTSE 100 Index of the United Kingdom, and the Nikkei-225...

We propose a direct and robust method for quantifying the variance risk premium on financial assets. We theoretically and numerically show that the risk-neutral expected value of the return variance, also known as the variance swap rate, is well approximated by the value of a particular...

Levy processes can capture the behaviors of return innovations on a full range of financial securities. Applying stochastic time changes to the Levy processes randomizes the clock on which the processes run, thus generating stochastic volatilities and stochastic higher return moments. Therefore,...