Stremme and an anonymous referee for helpful remarks and comments. Financial support from the DFG, SFB 303 at the University of Bonn and from the Union Bank of Switzerland is gratefully acknowledged.

This paper investigates Black–Scholes call and put option thetas, and derives upper and lower bounds for thetas as a function of underlying asset value. It is well known that the maximum time premium of an option occurs when the underlying asset value equals the exercise price. However, we show that the maximum option theta does not occur at that point, but instead occurs when the asset value i...

In this research, two risk hedging strategies, the option contract and the advance purchase discount contract, are investigated within a manufacturer–retailer two-echelon supply chain context. This study offers three contributions. First, the optimal decisions under the two contracts from the perspectives of both the manufacturer and the retailer are determined. Second, circumstances under whic...

In this paper we derive a market value for with-profits guaranteed annuity options (GAOs) using martingale modelling techniques. Furthermore, we show how to construct a static replicating portfolio of vanilla interest rate swaptions that replicates the with-profits GAO. Finally, we illustrate with historical UK interest rate data from the period 1980 to 2000 that the static replicating portfoli...

We examine Schweizer's (1991) locally risk-minimizing (LRM) hedge approach for hedging a European call in the case when the stock price follows a Poisson jump di usion process with lognormally distributed jump sizes. In contrast to Merton's (1976) hedging strategy where di usion risk is perfectly hedged while jump risk remains un-hedged, the locally risk-minimizing strategy hedges both di usion...

The twin problems of hedging and pricing of options in discrete-time markets are analyzed. We consider trading strategies consisting of one stock and one bond. The bond price rises deterministically over time while the stock price can change in several (more than two) ways at each instant of trading. Given such stock price movements, perfect hedging is not possible, and arbitrage arguments alon...