An examination of the effectiveness of static hedging in the presence of stochastic volatility

Toft and Xuan (1998) use simulation evidence to demonstrate that the static hedging method of Derman et al. (1995) performs inadequately when volatility is stochastic. Particularly, the greater the “volatility of volatility,” the poorer the static hedge. This article presents an alternative static hedging methodology, denoted the generalized static hedge, that appears to perform more reliably. Specifically, the value, delta, and vega of the static hedges closely approximate those values of the barrier option being hedged. Further, simulation evidence indicates that when volatility of volatility is large, the standard deviation of simulated cash flows from the generalized static hedge position is less than the standard deviation of simulated cash flows from previously defined static hedge positions. © 2003 Wiley Periodicals, Inc. Jrl Fut Mark 23:859–890, 2003     

Trade Protection in Five EU Member Candidate Countries by Exchange Rate Adjustment,Customs Tariffs,and Nontariff Measures

Five central European candidate member countries for EU accession (Czech Republic, Hungary, Poland, Slovakia, Slovenia = CE-5) entered into the transition period with undervalued exchange rates to stimulate exports and protect domestic industries. However, this policy was not maintained. During 1993–1995, real currency appreciation increased competitive pressure by foreign firms. To protect domestic firms, governments applied high third-country tariffs, temporary import taxes, and numerous administrative barriers to trade. As countervailing pressure by the EU and the U.S. increased and current account deficits soared in 1996 and 1997, the five countries more and more brought exchange rate policies in line with the changes in purchasing power parity.There seems to be a positive correlation between large current account deficits and the more intense use of nontariff protectionist measures. Using exchange rate measures, Slovenia keeps the current account rather balanced. It employs many less nontariff protectionist measures than the other four countries, which show strong tendencies towards real exchange rate appreciation.     

The financial system matters: future perspectives and scenarios for a sustainable future

D. Meadows considered in his report ‘limits of growth’ the financial system as a neutral accounting system and came to a pessimistic view. But the money-system itself creates several side effects and distorts our economic system right from the beginning. The money-system is not neutral. New scenario modelings considering the financial system can come to a positive perspective. Three from six systematically developed scenarios include paths to different kinds of sustainability. From a systemic view, the combination of conventional and complementary solutions can provide a substantial contribution towards a sustainable future.     

ADAPTIVE MESH MODELING AND BARRIER OPTION PRICING UNDER A JUMP‐DIFFUSION PROCESS

The computational burden of numerical barrier option pricing is significant, even prohibitive, for some parameterizations—especially for more realistic models of underlying asset behavior, such as jump diffusions. We extend a binomial jump diffusion pricing algorithm into a trinomial setting and demonstrate how an adaptive mesh may fit into the model. Our result is a barrier option pricing method that employs fewer computational resources, reducing run times substantially. We demonstrate that this extension allows the pricing of options that were previously computationally infeasible and examine the parameterizations in which use of the adaptive mesh is most beneficial.     

Trade in International Maritime Services: How Much Does Policy Matter?

Maritime transport costs significantly impede internationaltrade. This article examines why these costs are so high insome countries and quantifies the importance of two explanations:restrictive trade policies and private anticompetitive practices.It finds that both matter, but the latter have a greater impact.Trade liberalization and the breakup of private carrier agreementswould lead to an average of one-third lower liner transportprices and to cost savings of up to US$3 billion on goods carriedto the United States alone. The policy implications are clear:there is a need not only for further liberalization of governmentpolicy but also for strengthened international disciplines onrestrictive business practices. The authors propose an approachto developing such disciplines in the current round of servicesnegotiations at the World Trade Organization.     

Model-Based Decision Support in Manufacturing and Service Networks

In this paper, we sketch some of the challenges that should be addressed in future research efforts for model-based decision support in manufacturing and service networks. This includes integration issues, taking into account the autonomy of the decision-making entities in face of information asymmetry, the modeling of preferences of the decision makers, efficiently determining robust solutions, i.e. solutions that are insensitive with respect to changes in the problem data, and a reduction of the time needed for model building and usage. The problem solution cycle includes problem analysis, the design of appropriate algorithms and their performance assessment. We are interested in a prototypical integration of the proposed methods within application systems, which can be followed up with field tests of the extended application systems. We argue that the described research agenda requires the interdisciplinary collaboration of business and information systems engineering researchers with colleagues from management science, computer science, and operations research. In addition, we present some exemplifying, illustrative examples of relevant research results.