We appreciate the thorough review and very useful comments of Cheng, Ibraimi, Leippold, and Zhang. The suggestions have helped significantly to improve our original approximation formula and lead us to provide an exact solution under the Lin and Chang (2010) framework and we thank the editor to...

Volatility swaps and volatility options are financial products written on discretely sampled realized variance. Actively traded in over-the-counter markets, these products are often priced by continuously sampled approximations to simplify the computations. This paper presents an analytical...

This paper examines the impact of allowing for stochastic volatility and jumps (SVJ) in a structural model on corporate credit risk prediction. The results from a simulation study verify the better performance of the SVJ model compared with the commonly used Merton model, and three sources are...

We derive semi-analytic solutions for power option prices under the Heston model; specifically, the pricing formula is shown to be valid whenever the power of the underlying asset price has a finite moment. Unlike the majority of stochastic volatility models, there remains a significant problem...

The recent theoretical asset allocation literature has derived optimal dynamic investment strategies in various advanced models of asset returns. But how sensitive is investor welfare to deviations from the theoretically optimal strategy? Will unsophisticated investors do almost as well as...

To value non-transferable non-hedgeable (NTNH) contingent claims and price executive stock options (ESOs), we use a replication argument to translate portfolios with NTNH derivatives into portfolios of primary assets (only) with stochastic portfolio constraints. By identifying stochastic...

External barrier options are two-asset options where the payoff is defined on one asset and the barrier is defined on another asset. In this paper, we derive the Laplace transforms of the prices and deltas for the external single and double barrier options where the underlying asset prices...

We propose a new algorithm for computing the Greeks in jump-diffusion settings using binomial trees. We further demonstrate that the Greeks for European options converge to the Malliavin Greeks in the continuous time model. Our proposed algorithm is efficient, because the price and the Greeks...

We reveal pitfalls in the hedging of insurance contracts with a minimum return guarantee on the underlying investment, e.g. an external mutual fund. We analyze basis risk entailed by hedging the guarantee with a dynamic portfolio of proxy assets for the funds. We also take account of liquidity...

We show that Australian options are equivalent to fixed or floating strike Asian options and consequently that by studying Asian options from the Australian perspective and vice versa, much can be gained. One specific application of this “Australian approach” leads to a natural dimension...