To explain the strategic dimension in pricing options, it will be helpful to go back to the heart of the idea behind the concept of an option: options open up the possibility to postpone current decisions to a future point of time. Because of this flexibility additional information and new...

Basel II changes risk management in banks strongly. Internal rating procedures would lead one to expect that banks are changing over to active risk control. But, if risk management is no longer a simple "game against natureʺ, if all agents involved are active players then a shift from a...

In this paper we challenge basic results of signaling models. In our banking model each project of a borrower is described by a continuous density of outcomes. Different density functions are classified according to second stochastisch dominance. Combining these features we find that in a...

The mainstream model of option pricing is based on an exogenously given process of price movements. The implication of this assumption is that price movements are not affected by actions of market participants. However, if we assume that there are indeed impacts on the price movements it no...

This paper examines the interplay between the real and financial decisions of the competitive firm `a la Sandmo. Besides output price uncertainty, the firm faces additional sources of risk which are aggregated into an additive background risk. We show that the firm always chooses its optimal...

In this paper we study the impact of more transparency in the foreign exchange market on the ex ante expected volume of international trade. Transparency is measured by the informational content of publicly observed signals correlated to the random exchange rate. We find that more transparency...

In this paper we study the impact of more transparency in the interbank market on the volume of bank intermediated loans and on the profitability of the banking business. Transparency is modeled by means of the informational content of publicly observable signals correlated to the random...

The competitive allocation of labor across different sectors of an economy may not be socially optimal when one sector uses foreign capital. We argue that a suitably designed government intervention is required to restrict the sectors to their optimal size and maximize national welfare. Such a...

International and national investors are often exposed to real wealth risks, stemming from volatile asset prices and inflation uncertainty, making it difficult to stabilize consumption patterns. However, investors can enter futures markets to hedge against these risks. The paper develops a...

This paper considers a model of spatial allocation of investment capital under uncertainty. We demonstrate that the spatial concentration of economic activity depends upon properties of risk preferences deeper than risk aversion. The degree of so-called relative prudence unambiguously decides...