The quality option and timing option in futures contracts
Article Abstract:
Often futures contracts contain quality options whereby the short position has the choice of delivering one of an acceptable set of assets. We explore the implications of the quality option on the futures price. We develop a method for pricing the quality option for the general case of n deliverable assets and provide numerical illustrations of its significance. Even when the asset prices are very highly correlated, the option can have nontrivial value, especially when there is a large number of deliverable assets. We analyze the impact of the timing option and its interaction with the quality option. A procedure is developed for valuing the timing option in the presence of the quality option, and some numerical estimates are obtained. (Reprinted by permission of the publisher.)
Publication Name: Journal of Finance
Subject: Business
ISSN: 0022-1082
Year: 1989
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Risk in banking and capital regulation
Article Abstract:
This paper investigates the role of bank capital regulation in risk control. It is known that banks choose portfolios of higher risk because of inefficiently priced deposit insurance. Bank capital regulation is a way to redress this bias toward risk. Utilizing the mean-variance model, the following results are shown: (a) the use of simple capital ratios in regulation is an ineffective means to bound the insolvency risk of banks; (b) as a solution to problems of the capital ratio regulation, the 'theoretically correct' risk weights under the risk-based capital plan are explicitly derived; and (c) the 'theoretically correct' risk weights are restrictions on asset composition, which alters the optimal portfolio choice of banking firms. (Reprinted by permission of the publisher.)
Publication Name: Journal of Finance
Subject: Business
ISSN: 0022-1082
Year: 1988
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A theoretical analysis of real estate returns
Article Abstract:
Real estate investments have been an accepted hedge against inflation since the late 1970s. Two theories as to why these investments perform so well during inflationary times are investigated: the random event theory, and the hedge demand argument. The theories are tested using inflation betas related to various capital asset categories. Testing reveals support for both theories, although the test results are not definitive enough to favor either theory over the other. Despite the inconclusive quality of the tests developed, the discussion of the research notes that it is important, since so little academic research prior to this has supported theories espousing the effects of perceptions about markets on market prices.
Publication Name: Journal of Finance
Subject: Business
ISSN: 0022-1082
Year: 1985
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