The authors previously had extended the theoretical put-call parity models developed by Stoll (1969) and Merton (1973) to include a dividend term. Ex post tests of the models were generally consistent with market efficiency, but a sufficient number of hedges had high enough returns to warrant analysis of ex ante results. The purpose of this study was to construct hedges 5 and 15 minutes after they were initially identified as having an ex post return in excess of $20 per hedge. The results indicate that mispriced options adjust and that economic profit is sensitive to the level of transaction costs and unlikely even for member firms.

1. The Options Market. 2. Option Payoffs and Option Strategies. 3. Bounds on Option Prices. 4. European Option Pricing. 5. Option Sensitivities and Option Hedging. 6. American Option Pricing. 7. Options on Stock Indexes, Foreign Currency, and Futures. 8. The Options Approach to Corporate Securities. OPTION! Installation and Quick Start Exercises for OPTION!. Index. Appendix.

In this paper, ex ante efficient portfolio selection strategies are developed to realize potential gains from international diversification under flexible exchange rates. It is shown that exchange rate uncertainty is a largely nondiversifiable factor adversely affecting the performance of international portfolios. Therefore, it is essential to effectively control exchange rate volatility. For that purpose, two methods of exchange risk reduction are simultaneously employed: multicurrency diversification and hedging via forward exchange contracts. The empirical findings show that international portfolio selection strategies designed to control both estimation and exchange risks almost consistently outperform the U.S. domestic portfolio in out‐of‐sample periods.

Recently, the case for international portfolio diversification has been convincingly argued in the framework of mean‐variance portfolio analysis by a number of researchers. However, virtually no empirical documentation exists concerning the best method for estimating the correlation structure of international share prices. In this paper, 12 models for estimating the international correlation matrix are presented and empirically tested relative to full historical extrapolation. The major evaluation criteria are the mean squared error and stochastic dominance based on the frequency distribution of the squared forecast errors. The results indicate that the National Mean Model strictly dominates all the others in terms of forecasting accuracy.