If the Black-Scholes model and its extensions were the discoveries of the 70s and 80s, then Value-at-risk (VaR) models are the darlings of the 90s. These models have many uses within an organisation; for example, a risk manager may use VaR to allocate trading limits, senior management for asset...

Jump diffusion models have two weaknesses: they don't allow you to hedge and the parameters are very hard to measure. Nobody likes a model that tells you that hedging is impossible (even though that may correspond to common sense) and in the classical jump-diffusion model of Merton the best that...

This paper proves that the optimal exercise time for the holder of an American option depends upon the physical drift of the underlying asset and the utility of the option holder. We illustrate our results by applying them to several families of utility functions, namely the CARA, the HARA, and...

The modelling of credit risk, credit derivatives and non-hedgeable securities in general is currently in a poor state. Ideas from equity options theory have been adopted for credit risk, but have not been adapted for the peculiarities of this more complex world. This brief paper is a review and...

We explain the ideas behind the valuation of options with early exercise features, so called American options. We also aim to clarify some popular misconceptions about when an American option should be exercised. These misconceptions seem to be prevalent among both academics and practitioners.

We show how to use 'uncertainty' in place of the more traditional Brownian 'randomness' to model a short-term interest rate. The advantage of this model is principally that it is difficult to show statistically that it is wrong. Whether the model is useful for pricing fixed-income products is...

Two of the authors (DE and PW) recently introduced a non-probabilistic spot interest rate model. The key concepts in this model are the non-diffusive nature of the spot rate process and the uncertainty in the parameters. The model assumes the worst possible outcome for the spot rate path when...

In this paper we model the value of a firm based on its current earnings and cash balances. The value is modelled on the assumption that earnings follow a mean-reverting process. The effect of advertising on earnings is modelled, and the condition for optimal advertising derived. The value of...

Functional Signal plus Noise (FSN) time series models are introduced for the econometric analysis of the dynamics of a large cross-section of prices in which contemporaneous observations are functionally related. A semiparametric FSN model is developed in which a smooth, cubic spline signal...

The purpose of this paper is to assess the choice between adopting a monetary base or an interest rate setting instrument to maintain financial stability. Our results suggest that the interest rate instrument is preferable, since during times of a panic or financial crisis the Central Bank...