Trend derivatives: Pricing,hedging, and application to executive stock options

Both institutional and private investors often have only limited flexibility in timing their investment decision. They look for investments that will ideally be independent of the timing decision. In this article, a new class of derivative products whose payoff is linked to the trend of the underlying instrument is introduced. By linking the trend to the payoff, the timing of the decision becomes less important. Therefore, trend derivatives offer some time‐diversification benefits. How trend derivatives are designed and priced is shown. Due to their peculiar features, trend derivatives offer some interesting applications such as executive stock option plans. © 2007 Wiley Periodicals, Inc. Jrl Fut Mark 27:151–186, 2007     

Replacing executive stock options with share units: A Canadian study

Are share units a better compensation tool than stock options? This paper studies the impact of a transition within the compensation structures of CEOs of companies listed on the TSX Composite Index. Specifically, we ask whether replacing options with units-based compensation reduces the volatility of these companies' stock prices while promoting better returns. Our findings show that a shift to share units reduces large-cap Canadian companies' total risk through its idiosyncratic component. This transition is also accompanied by an increase in their risk-adjusted accounting and market performance. This suggests that share units are better for compensation contracts.     

Spatial competition with endogenous location choices: An application to discount retailing

This paper examines the importance of geographical differentiation in store location decisions of firms in the retail discount industry. Using a novel data set that includes the store locations and accompanying market conditions for all stores belonging to the Wal-Mart, Kmart, and Target chains, we study the factors that influence the entry and location decisions of these firms. The model involves an incomplete information game between the three players where each firm has private information about its own profitability. A key feature of our modeling approach is that it permits asymmetries across firms in the impact of exogenous market characteristics and competitive interaction effects. Variations in the exogenous firm specific characteristics, such as the distances from the market to firms’ headquarters and the nearest distribution centers, serve as exclusion restrictions and provide the source for model identification. Parameter estimates of the payoff functions are used to predict the equilibrium market structure under a variety of market conditions that provide insights into the competitive landscape of the industry. Results show that all firms exert a strong negative impact on competitors when they are in close proximity, but the effect decreases with distance to rivals suggesting strong returns to spatial differentiation in this industry. Target stores fare well under competition except when these competitors are in close proximity. Wal-Mart’s supercenter format is found to be the most formidable player as it substantially impacts competitors even at a large distance. We also find significant asymmetries across players in their response to market conditions and competition interactions.

中国上市公司现金流管理研究——兼对中美市场现金流管理行为比较研究

This paper examines cash flow management in the Chinese market and compares it to that in the U.S. market. It adopts Burgstahler and Dichev (1997) and Degeorge et al.’s (1999) method and the best-fitted distribution model to analyze the financial data of Chinese listed firms during 1998–2005 and the forecasted cash flow per share (CPS) data for Chinese firms in the I/B/E/S database during 1993–2005. Results reveal that cash flows reports are not as reliable as people think, and managers manipulate cash flows just as they manipulate earnings. Further analyses show that zero point, last year’s cash flow and analyst cash flow forecast are the three thresholds that influence managers’ decision when they report cash flow performance. Over 16% of the firms with small positive cash flows manipulate their cash flow. Moreover, 16.64% of the firms with small changes in cash flow and 9.81% of the firms with small surprises manipulate cash flows to reach the targets. A comparative analysis shows that cash flow management behaviors around zero and zero changes are more prevalent in the Chinese market than in the U.S. market. Cash flow management around analyst cash flow forecasts, however, is no more prevalent than that in the U.S. market. Translated and revised from Zhongguo Kuaiji Pinglun 中国会计评论 (China Accounting Review), 2007, 5(3): 381–400     

Trade barriers and trade flows with product heterogeneity: An application to US motion picture exports

We extend Melitz (2003) to allow for both global and bilateral fixed export costs. If global (bilateral) export costs dominate, the average sales ratio (import sales per product variety/domestic sales per variety), decreases (increases) in variable (fixed) trade barriers, due to adjustment along the intensive (extensive) margin of trade. Using novel data on bilateral US movie exports we find that (i) variation in box-office revenues per movie is much larger than in the number of movies exported, and (ii) the average sales ratio decreases in geographic and linguistic distance. These findings suggest that global fixed export costs dominate.