We consider portfolios whose returns depend on at least three variables and show the effect of the correlation structure on the probabilities of the extreme outcomes of the portfolio return, using a multivariate binomial approximation. The portfolio risk is then managed by using derivatives. We...

In this paper, we suggest an efficient method of approximating a general, multivariate lognormal distribution by a multivariate binomial process. There are two features of such multivariate distributions that are of interest. First, the state variables may have volatilities that change over...

The value and hedge ratio of an American-style option are shown to be closely approximated by a simple quadratic formula. The technique requires the estimation of the values and hedge ratios of just two options: a European option and a twice-exercisable option. These can be computed...

In general, the risk of a financial instrument on a future valuation date depends on several stochastic variables. In the case of a currency swap, its value on a future date can be modelled as a function of five stochastic variables. These represent the factors that determine the term structure...

The valuation of American-style bond options involves two important aspects that need to be modeled carefully. First, stochastic interest rates influence the volatility of the price of the bond, the underlying asset, in a complex fashion as the bond approaches maturity, and hence, the...

In this paper, we suggest an efficient method of approximating a general, multivariate lognormal distribution by a multivariate binomial process. There are two important features of such multivariate distributions. First, the state variables may have volatilities that change over time. Second,...

We build a multi-factor, no-arbitrage model of the term structure of spot interest rates. The stochastic factors are the short-term interest rate and the premia of the futures rates over the short-term interest rates.(...)

We consider the demand for state-contingent claims, in the presence of an independent zero-mean, non-hedgeable background risk. An agent is defined to be generalized risk averse if he/she chooses a demand function for contingent claims with a smaller slope everywhere, given a simple increase in...

We present a necessary and sufficient condition on an agent's utility function for a simple mean preserving spread in an independent background risk to increase the agent's risk aversion (incremental risk vulnerability). Gollier and Pratt (1996) have shown that declining and convex risk aversion...

The choice of an agent between risky and riskless assets is complicated by the existence of idiosyncratic risk. In this paper the agent chooses state-dependent shares of aggregate marketable income (a sharing rule) to provide a partial hedge against the idiosyncratic risk. The agent's Utility...