An important determinant of option prices is the elasticity of the pricing kernel used to price all claims in the economy. In this paper, we first show that for a given forward price of the underlying asset, option prices are higher when the elasticity of the pricing kernel is declining than...

This paper assumes that the underlying asset prices are lognormally distributed, and derives necessary and sufficient conditions for the valuation of options using a Blackâ€Scholes type methodology. It is shown that the price of a futuresâ€style, markedâ€toâ€market option is given by...

Credit default swaps (CDS) have been growing in importance in the global financial markets. However, their role has been hotly debated, in industry and academia, particularly since the credit crisis of 2007–2009. We review the extant literature on CDS that has accumulated over the past two...

In this paper, we derive an equilibrium in which some investors buy call/put options on the market portfolio while others sell them. Also, some investors supply and others demand forward contracts. Since investors are assumed to have similar risk-averse preferences, the demand for these...

The choice of an agent between risky and riskless assets is complicated by the existence of idiosyncratic risk. In this paper the agent chooses state-dependent shares of aggregate marketable income (a sharing rule) to provide a partial hedge against the idiosyncratic risk. The agent's Utility...

We study the impact of financial innovations on real investment decisions within the framework of an incomplete market economy comprised of firms, investors, and an intermediary. The firms face unique investment opportunities that arise in their business operations and can be undertaken at given...

We examine the effects of credit default swaps (CDS), a major type of over-thecounter derivative, on the corporate liquidity management of the reference firms. CDS help firms to access the credit market since the lenders can hedge their credit risk more easily using these contracts. However,...