In this paper we examine the structure of American option valuation problems and derive the analytic valuation formulas under general underlying security price processes by an alternative but intuitive method. For alternative diffusion processes, we derive closed-form analytic valuation formulas and analyze the implications of asset price dynamics on the early exercise premiums of American opti...

The insurance industry currently discusses to which extend they can integrate an illiquidity premium into their best estimate considerations of insurance liabilities. The present position paper studies this question from an actuarial perspective that is based on marketconsistent valuation. We conclude that mathematical theory does not allow for discounting insurance liabilities with an illiquid...

The notion of “value” has always been a subjective and contentious issue. Indeed, Value is in the eye of the beholder. There are varied methods and practices for valuing property, as there are industries in which they are applied. For example, there are “replacement value”, “insurance value, “salvage value”, “appraised value”, “book value” and “fair market value”, to name a few, although in the...

A valuation principle is a mapping that assigns a number (value) to a random variable (payoff). This paper constructs a transformation on valuation principles by embedding them in a financial environment. Given an a priori valuation rule u, we define the associated a posteriori valuation rule h by an indifference argument: The u-value of optimally investing in the financial market alone should ...

The valuation of stock options and currency options has witnessed an explosion of new development in the past twenty years. These models, set up either in a partial equilibrium or a general equilibrium framework, have certainly enriched our understanding of option valuation in one way or the other. However, the main drawback of these models is that stock options and currency options are analyze...

Currently, there are two market models for valuation and risk management of interest rate derivatives, the LIBOR and swap market models. In this paper, we introduce arbitrage-free constant maturity swap (CMS) market models and generic market models featuring forward rates that span periods other than the classical LIBOR and swap periods. We develop generic expressions for the drift terms occurr...