The article presents the authors' reply to comments on lognormal Cost-Volume-Profit (CVP) model. CVP model allows for dependent relationships among the input variables, large coefficients of variation and it permits a rigorous derivation of the distribution of the output random variable, profit. Authors feel that the model is an attractive and justifiable alternative to the normal model proposed by researchers R.K. Jaedicke and A.A. Robichek. The model is based on assumptions that quantity and contribution margin are lognormally distributed random variables and fixed costs are deterministic. Authors state that the richness of the model is reduced considerably due to the grouping of price and variable cost and the deterministic assumptions for fixed cost. Authors' second comment pertains to the desirability and intuitiveness of the lognormal assumptions. They discuss the relationship between the coefficient of variation and skewness, deriving the mathematical relationship in an equation.

Presents a study which developed a procedure for approximating the distribution of profit in a Cost-Volume-Profit (CVP) model using a log normal approach. Overview of the Jaedicke-Robichek model; Log normal model for CVP analysis; Comparison of normal and log normal models.

Jimmy E. Hilliard, Jeff Madura, Alan L. Tucker, Currency Option Pricing with Stochastic Domestic and Foreign Interest Rates, The Journal of Financial and Quantitative Analysis, Vol. 26, No. 2 (Jun., 1991), pp. 139-151

We develop a jump-diffusion model for pricing and hedging with margined options on futures. Unlike a standard equity option, margined options require no up-front payment. An attractive feature of margined options is that there is no early exercise premiums under general assumptions. Model parameter estimates and out-of-sample pricing errors are calculated using data on Brent crude contracts. Using the same pricing technology, we also hedge equity style options with margined options. Hedging coefficients are derived by matching an extended set of Greeks. We find that a target equity option can be effectively hedged using a portfolio of two margined options and the underlying. As has been reported elsewhere, a delta hedge is inappropriate when the underlying is a jump-diffusion.