We consider an option c which is contingent on an underlying ~ S that is not a traded asset. This situation typically arises in the context of real options. We investigate the situation when there is a “surrogate“ traded asset S whose price process is highly correlated with that of ~ S. An illustration would be the cases where S and ~ S model two different brands of crude oil. The main result o...

We theoretically model and empirically quantify the feedback effect of delta hedging for spot market volatility forex market. start from an economy with two types traders, aggregated option maker (OMM) taker (OMT), whose exposures reflect total outstanding positions all traders in A different hedge ratio OMM OMT leads to a net activity, which introduces friction. represent this friction by simp...

It has often been argued that there exists an underlying biological basis of utility functions. Taking this line of argument a step further in this paper, we have aimed to computationally demonstrate the biological basis of the Black-Scholes functional form as applied to classical option pricing and hedging theory. The evolutionary optimality of the classical Black-Scholes function has been com...

This paper extends the investigation of the effect of managerial motives on hedging policy. I utilize a proxy variable that incorporates CEO incentives to increase risk relative to incentives to increase stock price. The variable is directly measured using observed characteristics of CEO portfolios of stock and option holdings. Furthermore, CEO risk-taking incentives are modeled as a choice var...

This paper deals with the valuation and hedging of counterparty risk on OTC derivatives. Our study is done in a multiple-curve setup reflecting the various funding constraints (or costs) involved, allowing one to investigate the question of interaction between counterparty risk and funding. The correction in value of a contract due to counterparty risk under funding constraints is represented a...

We propose a new method for pricing options based on GARCH models with filtered historical innovations. In an incomplete market framework we allow for different distributions of the historical and the pricing return dynamics enhancing the model flexibility to fit market option prices. An extensive empirical analysis based on S&P 500 index options shows that our model outperforms other competing...

Maximum Relative Drawdown measures the largest percentage drop of the price process on a given time interval. More recently, Maximum Relative Drawdown has become more popular as an alternative measure of risk. In contrast to the Value at Risk measure, it captures the path property of the price process. In this article, we propose a partial differential equation approach to determine the theoret...