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...

This paper examines the effects of hedging activities and executive compensation on firm value by incorporating the endogenous relationship between the two managerial decisions for a sample of U.S. oil and gas producers. Theories of hedging based on market imperfections imply that hedging should increase market value of firms. Likewise, the design of executive risk-incentive compensation is to ...

In the current financial crisis, promoting rapid developments of gold industry, ensuring healthy operations of national economy, and actively developing the gold futures market are very important. Functioning of the gold futures market will determine the gold market maturity and integrity. Risk transfer is one of the two basic functions of futures market. The risk transfer function is realized ...

We compare the performance of various hedging strategies for index collateralized debt obligation (CDO) tranches across a variety of models and hedging methods during the recent credit crisis. Our empirical analysis shows evidence for market incompleteness: a large proportion of risk in the CDO tranches appears to be unhedgeable. We also show that, unlike what is commonly assumed, dynamic model...

How should price models be chosen for real option valuation and how should real option cash flows be hedged in the presence of model error? We consider a specific type of model error in the context of the natural gas storage real option: The assumed number of factors in a multifactor futures price model differs from the true number of factors. In terms of valuation, model error does not seem to...

Using a result in Angelini and Herzel (2009a), we measure, in terms of variance, the cost of hedging a contingent claim when the hedging portfolio is re-balanced at a discrete set of dates. We analyze the dependence of the variance of the hedging error on the skewness and kurtosis as modeled by a Normal Inverse Gaussian model. We consider two types of strategies, the standard Black-Scholes Delt...

Incentive compensation induces correlation between the portfolio of managers and the cash flow of the firms they manage. This correlation exposes managers to risk and hence gives them an incentive to hedge against the poor performance of their firms. We study the agency problem between shareholders and a manager when the manager can hedge his incentive compensation using financial markets and s...

In this paper, we consider the hedging of portfolio loss derivatives using single-name credit default swaps as hedging instruments. The hedging issue is investigated in a general pure jump dynamic setting where default times are assumed to admit a joint density. In a first step, we compute default intensities adapted to the global filtration of defaults. In particular, we stress the impact of a...

In this paper, the financial engineering minimum risk-based portfolio hedging model is first analyzed. It is then followed by the investigation on various major estimation methods for the minimum risk hedge ratio. The results revealed in the current study show that the HR obtained by the ordinary least squares (OLS) model is maximal and the out-of-sample hedging performance is the best; however...