In the Black-Cox model, a firm makes default when its value hits an exponential barrier. Here, we propose an hybrid model that generalizes this framework. The default intensity can take two different values and switches when the firm value crosses the barrier. Of course, the intensity level is higher below the barrier. We get an analytic formula for the Laplace transform of the default time and...

Readers may make verbatim copies of this document for non-commercial purposes by any means, provided that this copyright notice appears on all such copies. Practitioners Abstract The optimal hedging model has become the standard theoretical model of normative hedging behavior due to its intuitive tradeoff of expected return with risk, its efficient use of information and its easy implementation...

Readers may make verbatim copies of this document for non-commercial purposes by any means, provided that this copyright notice appears on all such copies. Practitioners Abstract The optimal hedging model has become the standard theoretical model of normative hedging behavior due to its intuitive tradeoff of expected return with risk, its efficient use of information and its easy implementation...

Hedging a derivative security with non-risk-neutral number of shares leads to portfolio profit or loss. Unlike in the Black-Scholes world, the net present value of all future cash flows till maturity is no longer deterministic, and basis risk may be present at any time. The key object of our analysis is probability distribution of future P&L conditioned on the present value of the underlying. W...

We study a manufacturing firm that builds a product to stock to meet a random demand. Production time is deterministic, so that if there is a backlog, customers are quoted a firm lead time that is proportional to the backlog. In order to represent the customers’ response to waiting, we introduce a new defection function — the probability that a customer chooses not to order as a function of the...

Accurately quantifying and robustly hedging options embedded in the guarantees of variable annuities is a crucial task for insurance companies in preventing excessive liabilities. Due to sensitivities of the benefits to tails of the account value distribution, a simple Black-Scholes model is inadequate. A model which realistically describes the real world price dynamics over a long time horizon...

Managerial financial fraud is estimated in the billions of dollars annually in the United States. Since fraud includes obfuscation, misdirection, and fabrication, this study proposes using deception theory as a means of detecting fraud in textual portions of financial statements (10K). A corpus of 101 fraudulent 10Ks was collected from the Securities and Exchange Commission along with 101 match...

Genetic diversification of offspring represents a bet-hedging strategy that evolved as an adaptation to unpredictable environments. The benefits of sexual reproduction come with severe costs. For example, each offspring only carries half of each parent's genetic makeup through direct descent. The lower the reproductive rate, the more substantial the cost when considering the proportion of genes...

We consider a financial market with liquidity cost as in Çetin, Jarrow and Protter [3] where the supply function S(s, ν) depends on a parameter ε ≥ 0 with S(s, ν) = s corresponding to the perfect liquid situation. Using the PDE characterization of Çetin, Soner and Touzi [6] of the super-hedging cost of an option written on such a stock, we provide a Taylor expansion of the super-hedging cost in...

5 ABSTRACT This article provides a simple model for pricing and hedging options in the presence of jumps and liquidity costs. In the article, liquidity risk is modelled via a stochastic supply curve function and a jump-diffusion process is approximated by a Markov chain. Local risk minimization incorporating liquidity risk is proposed to price and hedge European options in this discrete10 time ...