We study effects of using Sharpe ratio as a performance measure for compensating money managers in a dynamic market. We demonstrate that the manager's focus on the short horizon is detrimental to the long-horizon investor. When the returns are iid, the performance loss is significant, even when...

We propose the use of a new option which we call 'quadratic,' and that central banks could use to smooth exchange rate volatility through the hedging strategies of the issuers. We derive analytic pricing and hedging formulas. We suggest a criterion to derive the optimal (for the Central Bank)...