Financial derivatives written on an underlying can normally be priced and hedged accurately only after a suitable mathematical model for the underlying has been determined. This chapter explains the difficulties in finding a (unique) realistic model — model uncertainty. If the wrong model is chosen for pricing and hedging, unexpected and unwelcome financial consequences may occur. By wrong mode...

Financial derivatives written on an underlying can normally be priced and hedged accurately only after a suitable mathematical model for the underlying has been determined. This chapter explains the difficulties in finding a (unique) realistic model: model uncertainty. If the wrong model is chosen for pricing and hedging, unexpected and unwelcome financial consequences may occur. By “wrong mode...

A key question is why many globally active firms forgo foreign exchange hedging despite its low costs. We propose an explanation based on incomplete hedging markets that further suggests that operational hedging is often a more effective hedge. We use 10-K filings to construct text-based measures of financial hedging and three offshore activities: the sale of output, the purchase of input, and ...

This paper presents a new dynamic approach to control and stabilize the global financial derivatives. Since 2007 the Global Financial Economy has been experiencing what is said to be the worst financial crisis since the Great Depression in the 1930’s. The Bank of International Settlements (BIS) in Switzerland has recently reported that global outstanding derivatives have reached 1.14 quadrillio...

Since the ideas of arbitrage free pricing were born, finance has changed radically both in theory and practice. Derivatives markets have evolved and options serve nowadays as underlyings and as hedging instruments. In this thesis, we consider some markets for equity derivatives. We start by statistical analysis of the markets for European options and variance swaps because these products are im...

inancial Accounting Standard (FAS) No. 133 requires that all derivatives be marked to market and that changes in their market value be recognized in earnings in the current period. Derivatives may qualify for special hedge accounting treatment, however, provided they are used to hedge specific risks and an effective hedging relationship can be documented. Companies that meet these requirements ...

W consider a firm that invests in capacity under demand uncertainty and thus faces two related but distinct types of risk: mismatch between capacity and demand and profit variability. Whereas mismatch risk can be mitigated with greater operational flexibility, profit variability can be reduced through financial hedging. We show that the relationship between these two risk mitigating strategies ...