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From first principles, using general no-arbitrage arguments across international markets, differential swaps and a variety of quanto options and futures are evaluated and replicated in closed form by explicit construction of their hedge portfolios, under the assumption of deterministic...
The paper describes a framework for delta and gamma hedging an interest rate portfolio using a multifactor form of the Heath et al. (1992) model. A formal description of bucket hedging is given along with a discussion of some of the issues surrounding the choice of bucket lengths. Given that a...
This paper addresses the issue of hedging options under proportional transaction costs. The Black-Scholes environment assumes frictionless markets in which one can replicate the option payoff exactly by continuous rehedging. However, when transaction costs are involved, frequent rehedging...
We propose a general framework to model equity volatility for a firm financed by equity and additional non-equity sources of funds. The stochastic nature of equity volatility is endogenous, and comes from the impact of a change in the value of the firm's assets on the financial leverage. We...
We consider Arrow's model for an economy engaged in consuming a randomly distributed natural resource, and in exploring previously unexplored land to find more of the resource. After modifying the model so that each discovery reveals a random amount of the resource, we use dynamic programming...
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