The valuation of options on futures contracts

Article Abstract:

The best policy for U.S. options on futures contracts, on the values of which are derived rational restrictions, generally involves premature exercise, and a model is developed for valuing options on futures contracts in a constant interest rate setting. The value of the U.S. feature seems to be small despite the optimal premature exercise, and a useful approximation is available from a European formula developed by Black. Another model is developed for valuing options with stochastic interest rates, with it shown that the pricing errors resulting from ignoring the location of the interest rate relative to its long-run mean are between five percent less to seven percent more when the current rate is plus or minus 200 basis points from its long-run value. This shows that interest rate expectations are important to the valuation; optimal exercise policies are derived from numerical methods for both models presented.

Research, Models, Stock-exchange, Stock exchanges, Financial futures, Interest rates, Capital assets, Foreign exchange futures

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In search of new foundations

Article Abstract:

The concept of an underlying theory of the firm is discussed and an argument presented that such a theory contains all of the roots necessary for corporate finance theory, empirical research, practical applications and policy recommendations. Existing theories deliver useful insights, but seem ineffective in coping with entirely new types of emerging businesses. A set of guidelines for a new theory of the firm that would change both theoretical and empirical corporate finance is presented, along with specific characteristics such a theory should satisfy. Fundamental views of corporate finance had less influence when firms were asset intensive and had stable boundaries, but can no longer be ignored when financing and governance choices actually change boundaries.

Capital funds & cash flow, Analysis, Business

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Continuous-time methods in finance: a review and an assessment

Article Abstract:

A survey of the development of continuous-time methods in financial analysis over the past 30 years is presented, with a particular emphasis on the subperiod 1969 to 1980 due to the rapid pace of development. Researchers in the 1970s developed new concepts regarding term structure theory, derivatives securities pricing and optimal choices for portfolios and consumption. Most research in the 1980s focused on extending these seminal theories. Continuous-time methods are concluded to be an integral part of financial economics research today.

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