STRATEGIC RULES ON SPECULATION IN THE FOREIGN EXCHANGE MARKET

In this article we specify the conditions for profitable speculaion in the foreign exchange market with spot and forward contracts. We derive the unique strategic rules from the initial two‐choice situations in a given environment. Finally, in a more complex structure involving covered arbitrage, speculative profits are computed with iterative plays. JEL classification: F310     

Analysts' Forecasts: Low-Balling,Market Efficiency,and Insider Trading

The phenomenon of low-balling reported in the financial press involves downward biased projections of earnings by managers or analysts, thereby artificially lowering market expectations and creating a positive earnings surprise when actual earnings are announced. This study reports that the stock market does respond to such surprises relative to analysts' reported forecasts. Further, the proportion of insider buy-transactions in the period prior to the earnings forecast is significantly higher for the sample with high positive earnings surprise than for the control sample with zero forecast errors. The study cannot distinguish whether managers or analysts are the source of the low-balling and therefore makes no statement on the legality of such insider trades.     

SOUTH–SOUTH TRADE: BEYOND GEOGRAPHY

Starting from a low base, south–south trade has picked up momentum over the last two decades. It is emerging as a new dimension of the global economy and can potentially usher in several benefits for developing economies. The emerging economies of the dynamic south (EEDS) not only provided a striking impetus to south–south trade but also contributed to the changing mise-en-scène of the global economy. However, given the moribund state of the Doha Round, additional policy measures need to be taken by the EEDS.     

LEVERAGE, RESOURCE ALLOCATION AND GROWTH

The effects of resource allocation on firms comprising the competitive economy are examined within the structure of a simple general equilibrium model. The study shows that capital structure of a firm is independent of its value, — a result that can be characterized as the mirror-image of the celebrated Modigliani-Miller proposition. The structure of present analysis highlights how costs of capital assets change, what affects the prices of the firms, and how these changes are reflected in the operations of the firms in an overall economic set up. The paper then establishes that if debt is increased, and the (relatively) levered firm expands, its stock price goes up and the (relatively) less levered firm shrinks and moves in the opposite direction in all respects. The appropriate conditions for profitable leveraged buyout are spelled out, and other conditions are also specified as to when merger is unprofitable. Finally, the paper is concluded with some thoughts on possible future research along the lines outlined in this work.     

Profit Possibilities in Currency Markets: Arbitrage, Hedging, and Speculation

This paper reviews and extends the existing literature on covered arbitrage, delineates the conditions for profitable arbitrage with the hedging instruments of forward and options contracts in the foreign exchange markets, and defines the maximum possible profits out of a given market environment. Next, the simple rules on speculation are articulated with and without transaction costs, and then we show how speculation can be covered with options and forwards. Finally, speculation is integrated with arbitrage and hedging, and further compounding of profit possibilities is illustrated.     

Lean Hong Kong Harvest and the Doha Round of Multilateral Trade Negotiations

Abstract

The biennial Ministerial Conferences are the most important event of the WTO regime. The Hong Kong Ministerial Conference was the sixth biennial conference of the WTO, which aimed at a low-level equilibrium and achieved it. While it successfully eschewed another Cancún-like disappointing failure, the Hong Kong Ministerial did not achieve much of substance. If success is defined as not failing, the Hong Kong Ministerial Conference could be adjudged a success. Few bold decisions were attempted and important outstanding decisions were put off for the future. Liberalization of multilateral trade in agriculture was the most important as well as the most contentious issue in Hong Kong. A good number of significant secondary areas were also under negotiations. Core modalities that were to be determined on these issues in Hong Kong were not. A reasonably successful Hong Kong Ministerial Conference would have helped in advancing the Doha Round, which in turn would have meant welfare gains to the global economy, and its different regions and sub-regions. This opportunity was evidently missed.     

Leveraged Lévy processes as models for stock prices

Adopting a constant elasticity of variance formulation in the context of a general Lévy process as the driving uncertainty we show that the presence of the leverage effect? ?One explanation of the documented negative relation between market volatilities and the level of asset prices (the ‘smile’ or ‘skew’), we term the ‘leverage effect’, argues that this negative relation reflects greater risk taking by the management, induced by a fall in the asset price, with a view of maximizing the option value of equity shareholders. in this form has the implication that asset price processes satisfy a scaling hypothesis. We develop forward partial integro-differential equations under a general Markovian setup, and show in two examples (both continuous and pure-jump Lévy) how to use them for option pricing when stock prices follow our leveraged Lévy processes. Using calibrated models we then show an example of simulation-based pricing and report on the adequacy of using leveraged Lévy models to value equity structured products.