Option pricing and hedging in a complete market are well-studied with nice results using martingale theories. However, they remain as open questions in incomplete markets. In particular, when the underlying processes involve jumps, there could be infinitely many martingale measures which give an interval of no-arbitrage prices instead of a unique one. Consequently, there is no martingale repres...

We model the interplay between cash and debt policies in the presence of financial constraints. While saving cash allows constrained firms to hedge against future cash flow shortfalls, reducing current debt – “saving borrowing capacity” – is a more effective way of securing investment in high cash flow states. This trade-off implies that constrained firms will allocate cash flows into cash hold...

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. Practitioner's Abstract The effectiveness of the Class III Milk futures market is analyzed in terms of the reduction in Value-at-Risk (VaR) for milk producers located in four regions: Wisconsin, Northeast, Florida and California. Constant he...

This paper investigates how the benefits of hedging currency risk and the incentives of a firm to hedge are affected by the hedging strategies of competing firms. In competitive industries, if currency hedging is uncommon, prices are expected to positively co-vary with exchange rate related cost shocks providing firms with a ‘natural hedge’. As the extent of currency hedging in an industry rise...

We address the issue of hedging in in nite horizon markets under cone constraints on the number of shares of assets. We show that the minimum cost of hedging a liability stream is equal to its largest present value with respect to admissible stochastic discount factors, thus can be determined without nding an optimal hedging strategy. We develop an algorithm by which an optimal portfolio in one...

In this article, we show, in the context of partial hedging, that some important relationships about comonotonicity and convex order cannot be translated to countermonotonicity in general because of the possibility of over-hedging. We propose a new notion, called proper hedge, that can effectively avoid over-hedging. Different characterizations of a proper hedge are given, and we show that this...

We use path integrals to calculate hedge parameters and efficacy of hedging in a quantum field theory generalization of the Heath, Jarrow, and Morton [Robert Jarrow, David Heath, and Andrew Morton, Econometrica 60, 77 (1992)] term structure model, which parsimoniously describes the evolution of imperfectly correlated forward rates. We calculate, within the model specification, the effectiveness...

Chapter Outline Introduction 61 Background 63 Distributional Effects of Dynamic Pricing 65 Barriers to Dynamic Pricing 69 Unfairness of Flat Rate Pricing 71 Dynamic Pricing in Other Industries 73 Overcoming the Barriers to Dynamic Pricing 74 The Effect of Dynamic Pricing on Low-Income Consumers 75 Accommodating Potential Objections 77 Conclusions 78 Appendix: Quantifying the Hedging Cost Premiu...

We address the problem of nding optimal hedging points of a production ow controller, in the sense of Bielecki and Kumar (1988). We model the dynamics of the controller by using generalized semi-Markov processes (GSMP); the GSMP framework lets us work with multiple states, and not only with exponential distribution but with fairly general distributions. Utilizing the GSMP representation, the se...

We analyze the demand for hedging and insurance by a firm facing cash-flow risks. We study how the firm’s liquidity management policy interacts with two types of risk: a Brownian risk that can be hedged through a financial derivative, and a Poisson risk that can be insured by an insurance contract. We find that the patterns of insurance and hedging decisions are pole apart: cash-poor firms shou...