A Closer Look at Barrier Exchange Options

A barrier exchange option is an exchange option that is knocked out the first time the prices of two underlying assets become equal. Lindset, S., & Persson, S.‐A. (2006) present a simple dynamic replication argument to show that, in the absence of arbitrage, the current value of the barrier exchange option is equal to the difference in the current prices of the underlying assets and that this pricing formula applies irrespective of whether the option is European or American. In this study, we take a closer look at barrier exchange options and show, despite the simplicity of the pricing formula presented by Lindset, S., & Persson, S.‐A. (2006), that the barrier exchange option in fact involves a surprising array of key concepts associated with the pricing of derivative securities including: put–call parity, barrier in–out parity, static vs. dynamic replication, martingale pricing, continuous vs. discontinuous price processes, and numeraires. We provide valuable intuition behind the pricing formula which explains its apparent simplicity. © 2011 Wiley Periodicals, Inc. Jrl Fut Mark 33:29–43, 2013     

The Demand for Food Products: An Analysis of Interpurchase Times and Purchased Quantities

In this paper we study household purchase behaviour of storable food products. An inventory model is developed in which the household chooses an optimal stock level of the product. Storage of the product is costly, there is a fixed cost per purchase occasion, and the market price is sometimes discounted because of price promotions. We show that the optimal purchase policy is an s , S policy. The model is used to derive predictions on the correlations between interpurchase times and purchased quantities on the one hand, and prices on the other. These predictions are empirically verified using consumer panel data.     

Liquidity-Based Competition for Order Flow

We present a microstructure model of competition for order flowbetween exchanges based on liquidity provision. We find thatneither a pure limit order market (PLM) nor a hybrid specialist/limitorder market (HM) structure is competition-proof. A PLM canalways be supported in equilibrium as the dominant market (i.e.,where the hybrid limit book is empty), but an HM can also besupported, for some market parameterizations, as the dominantmarket. We also show the possible coexistence of competing markets.Order preferencing—that is, decisions about where ordersare routed when investors are indifferent—is a key determinantof market viability. Welfare comparisons show that competitionbetween exchanges can increase as well as reduce the cost ofliquidity.     

Is presidential cycle in security returns merely a reflection of business conditions?

We confirm previous findings that both large-cap and small-cap stock returns in the US exhibit a presidential cycle pattern, i.e. returns are significantly higher in the last 2 years than in the first 2 years of the presidential term. We attempt to examine if this presidential cycle pattern can be explained away by the traditional business cycle proxies, namely the term spread (TERM), dividend yield (D/P), and default spread (DEF). Our motivation arises from the political business cycle theory that monetary and fiscal measures undertaken by presidents are usually translated into the business cycle. We find that the presidential cycle has explanatory power beyond business conditions proxies shown to be important in explaining stock returns. Tests of slope parameters show that stock returns are less sensitive to only the D/P during the last 2 years of the presidential term. The presidential cycle effect prevails even after controlling for the party in power and the incumbent versus nonincumbent presidents.     

EXPECTATIONS,INTEREST RATES,AND COMMERCIAL BANK STOCKS

This study examines the effect of current and expected interest rate changes on bank equity values and attempts to reconcile the conflicting findings of previous research regarding this issue. A multiple index market model of bank security returns is specified and estimated. The results confirm the existence of an interest rate effect on bank stocks that is not explained by returns on the market portfolio. In addition, bank stock returns appear to be sensitive to an interest rate forecast error.     

A causal analysis of black and official exchange rates: The turkish case

Zusammenfassung Eine Kausalanalyse von Schwarzmarktkursen und offiziellen Wechselkursen: Der Fall der Türkei. - Diese Arbeit untersucht statistisch den Kausalzusammenhang zwischen Schwarzmarkt- und offiziellen Wechselkursen für das türkische Pfund, und zwar im Verh?ltnis zum US-Dollar und zur D-Mark in der Zwei-Jahres-Periode ab September {dy1985}, wobei Granger-Techniken benutzt werden. T?gliche ?nderungen des Schwarzmarktkurses für die D-Mark gehen den t?glichen ?nderungen des offiziellen Kurses voraus. Bei w?chentlichen und monatlichen ?nderungen liegt eher eine Gleichzeitigkeit vor. Die Ergebnisse für den Schwarzmarktkurs und den offiziellen Dollar-Kurs sind ?hnlich, obwohl es Hinweise für einen schwachen Feedback gibt, wenn Tagesdaten benutzt werden. Diese Befunde stützen die These, da\ Schwarzm?rkte Informationen effizient verwerten.

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Resumen Un análisis de causalidad de tipos de cambio oficial y paralelo: el caso turco. - En este trabajo se examina estadísticamente la relación causal entre los tipos de cambio paralelo y oficial de la lira turca con respecto al dólar EE.UU. y el marco alemán para un período de dos a?os, comenzando en setiembre de {dy1985} y utilizando técnicas de tipo Granger. Los movimientos diarios en el mercado paralelo del marco dan lugar a movimientos diarios en el mercado oficial. Existe una relación contemporánea en los movimientos semanales y mensuales. Los resultados para el dólar paralelo y oficial son similares, a pesar de la evidencia de una respuesta débil en el caso de utilizarse datos diarios. Los resultados apoyan la noción de que los mercados paralelos son eficientes procesadores de información.

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Résumé Une analyse de causalité pour des taux de change noirs et officiels: le cas de la Turquie. - Cet article examine statistiquement la relation causale entre les taux de change noirs et officiels pour la lira turque vis-à-vis le dollar américain et la mark allemande pour une période de deux ans qui commence en septembre 1985. L’auteur applique des techniques de type Granger. Les changements quotidiens sur le marché noir pour la mark allemande précèdent ceux sur le marché officiel. Une relation simultanée existe pour les changements hebdomadaires et mensuels. Les résultats pour le dollar noir et officiel sont similaires bienqu’il y ait quelque évidence pour une répercussion faible si les données quotidiennes sont utilisées. Les résultats supportent la notion que les marchés noirs sont des processeurs efficients des informations.

     

Book Reviews

Indonesia: The Transmigration Program in Perspective, Washington, D.C.: World Bank, 1988, pp. 227 + xlii. Paper: US$17.00.

William Segers, Changing Economy in Indonesia, Vol. 8, Manufacturing Industry 1870–1942, Amsterdam: Royal Tropical Institute, 1988, pp. 224. Dfl. 48.00.

Leslie Castle and Christopher Findlay (Eds), Pacific Trade in Services, Allen and Unwin, Sydney, 1988, pp. 294 + Xiv. Paper: 24.95; Cloth: $39.95.     

The potential of internet technologies: insights from the public sector

The objective of this paper is to examine the implications of the internet for public sector organisations. Although there are considerable barriers to the full implementation of internet technologies, the findings illustrate that the internet presents public sector organisations with the potential to enhance the ways in which they fulfil the needs of users of their products and services.     

Training and Labour Market Flexibility: Is There a Trade-off?

This paper explores the nexus between work-related training and labour market 'flexibility' (which we proxy by contract type, part-time employment and lack of union coverage), using the first five waves of the British Household Panel Survey (BHPS) conducted over the period 1991–5. Our results show that workers on short-term employment contracts, who are working part-time or are not covered by a union collective agreement, are significantly less likely to be involved in any work-related training to improve or increase their skills. These findings suggest that there is a trade-off between expanding the more marginal forms of employment and expanding the proportion of the work-force getting work-related training.