Narrow Results

Seeing the firm as a nexus of activities and projects, we propose a characterization of the firm where variations in the market price of risk should induce adjustments in the firm's portfolio of projects. In a setting where managers disagree with respect to what investment maximizes value, changing the portfolio of projects generates coordination costs. We then propose a new role for financial risk management based on the idea that the use of financial derivatives reduces coordination costs by moving the organization's expected cash flows and risks toward a point where coordination in favor of real changes is easier to achieve. We find empirical support for this new rationale for the use of financial derivatives, after controlling for the traditional variables explaining the need for financial risk management.

We study the exchange rate exposures of a sample of firms that undertake large acquisitions of foreign companies. Using data from Securities and Exchange Commission (SEC) filings on their foreign operations and derivatives usage, we examine how the exposures change from before to after the acquisition. We find that these deals generally lead to reduced currency exposure, which reflects the fact that most of the firms already have business in the target's country and the mergers serve as operational hedges. In contrast, we do not find a statistically significant effect for hedging with currency derivatives despite the fact that many of the firms in the sample use such instruments.

This paper presents arbitrage and risk arbitrage betting strategies for Team Jai Alai. This game is the setting for the analysis and most results generalize to other sports betting situations and some financial market applications. The arbitrage conditions are utility free while the risk arbitrage wagers are constructed according to the Kelly criterion/capital growth theory that maximizes asymptotically long-run wealth almost surely.

I consider the Black–Scholes–Merton option-pricing model from several angles, including personal, technical and, most importantly, from the perspective of a paradigm-shifting mathematical formula.

Starting from humble beginnings, the use of financial options has substantially increased as an important financial tool for both speculation and hedging over the last 50 years. This chapter discusses both the theoretical and practical applications of financial options and related models. While the content is somewhat technical, we provide illustrations of their applications in simple settings. We address particular stylized features of option pricing models.

Based upon comparative analysis, we first discuss different kinds of Greek letters in terms of Black–Scholes option pricing model, then we show how these Greek letters can be applied to perform hedging and risk management. The relationship between delta, theta, and gamma is also explored in detail.

During the past couple of months, the pandemic situation raised the need for assessment of the impact on derivatives, particularly weather and freight derivatives, as an innovative financial product. There are several issues and challenges faced by weather and freight derivatives in the financial market. This chapter aims to appreciate innovative financial derivatives and also address issues relating to the functioning of weather and freight derivatives. We have also examined the pricing models of weather derivatives across the globe. In addition, we examine the impact of the COVID-19 pandemic situation on weather derivatives.

This research discusses the role of cryptocurrencies in portfolio investment and observes the timing within which the cryptos provide benefit to investors in a traditional financial market. We first use a mean-variance spanning test to check for any improvement that cryptos bring to a well-diversified portfolio and find a significant difference between port-folios with and without cryptos. Second, we analyze the weight dynamics of cryptos in the minimum-variance portfolio and the tangent portfolio to examine if cryptos present a hedging property in the mean-variance viewpoint. The finding shows that the optimal weights of cryptos increase distinctly in a market distress period, which shows their hedging property in a mean-variance view. Finally, we include cryptos in a well-diversified portfolio composed of common assets to check their weight dynamics in both tangent portfolio and minimum-variance portfolio. Consequently, we found that the cryptos take more weights in the tangent portfolio rather than in the minimum-variance portfolio, while the weights of cryptos increased in both portfolios during the COVID-19 pandemic; we thus conclude that cryptocurrencies can bring some hedging effect even in a portfolio with very common traditional assets. We also compare gold and cryptos and find that they have a similar pattern of weight dynamics, although gold has a slightly better effect in eliminating the downside risk of a minimum-variance portfolio.

We present arbitrage and risk arbitrage betting strategies for team jai alai. Most of the results generalize to other sports betting situations and some financial market applications. The arbitrage conditions are utility free. The risk arbitrage wagers use the Kelly expected log criterion.

In this chapter, we shall proceed one step further to investigate how a conditional mean as mentioned in Chap. 2 could be estimated using linear statistical relationship between the two variables. The two-variable linear regression is studied and an application on financial futures hedging will be investigated later in the chapter.