The equilibrium valuation of risky discrete cash flows in continuous time

Article Abstract:

This paper values a contingent claim to discrete stochastic cash flows generated by a Poisson arrival process with a randomly varying intensity parameter. In the most general case, both the size and the arrival intensity of cash flows may correlate with state variables in a continuous time economy. Assuming the conditions of an intertemporal capital asset pricing model, solutions for the value of the contingent claim can be found using various techniques. The paper suggests immediate applications to the valuation of insurance contracts, the decision to build a firm with unknown future investment opportunities, and the pricing of mortgage-backed securities. (Reprinted by permission of the publisher.)

Finance, Stochastic analysis, Cash flow, Mortgage-backed securities, Mortgage backed securities, Poisson distribution

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The valuation of sequential exchange opportunities

Article Abstract:

Sequential exchange opportunities are valued using the techniques of modern option-pricing theory. The vehicle for analysis is the concept of a compound exchange option. This security is shown to exist implicitly in several contractual settings. A valuation formula for this option is derived. The formula is shown to generalize much previous work in option pricing. Several applications of the formula are presented. (Reprinted by permission of the publisher.)

Acquisitions and mergers, Exchange

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Static hedging of exotic options

Article Abstract:

This paper develops static hedges for several exotic options using standard options. The method relies on a relationship between European puts and calls with different strike prices. The analysis allows for constant volatility or for volatility smiles or frowns. (Reprinted by permission of the publisher.)

Hedging (Finance)

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