Knowledge that Transforms

We develop a simple model in which the presence of portfolio insurers in a market of risk‐averse traders leads to multiple equilibria for the pricing of financial assets and can cause an increase in volatility, including insurance‐induced price drops. We demonstrate, however, that centralized portfolio insurance firms may actually reduce, not increase, volatility, even if the existence of these firms increases the total amount of funds under insurance.

Introduction to options profit diagrams arbitrage restrictions on option prices put-call parity binomial option pricing model the Black-Scholes option pricing model the importance of delta stock index options other options and applications introduction to financial futures financial futures pricing theory - the cost of carry model hedging with futures contracts stock index futures debt instruments - prices, yields and risk short term interest rate futures treasury bill and eurodollar futures foreign exchange futures futures options, debt options, foreign exchange options and swaps.

Previous studies of technical analysis statistical tests of risk-adjusted profits from trading rules - the X-test selected trading rules equally-weighted portfolios of currencies, with rules tailored for each currency variably-weighted portfolios of currencies, with rules tailored for each currency speculating on indexes of currencies speculating with a portfolio upgrade approach comparing the performances of technical trading strategies the stability of speculative profits implications for the theory and practice of financial economics implications for policymakers.

An example of a continuous time economy is given whose general equilibrium term structure of interest rates obeys the Expectations Hypothesis for continuously compounded interest rates and returns, contradicting the 1981 claim by Cox, Ingersoll, and Ross that such an economy is mathematically impossible. This example does not generate exploitable arbitrage opportunities of the type Cox, Ingersoll, and Ross claim must arise. The “Logarithmic Expectations Hypothesis,” as we call it, it therefore an acceptable benchmark from which to measure term premia in continuous time term structure modeling.

We use an extension of the equilibrium framework of Rubinstein (1976) and Brennan (1979) to derive an option valuation formula when the stock return volatility is both stochastic and systematic. Our formula incorporates a stochastic volatility process as well as a stochastic interest rate process in the valuation of options. If the “mean,” volatility, and “covariance” processes for the stock return and the consumption growth are predictable, our option valuation formula can be written in “preference-free” form. Further, many popular option valuation formulae in the literature can be written as special cases of our general formula.