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Levy (1992) applies the log-normal approximation in pricing an Asian currency option. 2 There is evidence for priced jump risk.

This study examines the lead-lag relationship between the stock market and CDS market in Korea using the firm-level data during 2006-2009. Our main findings can be summarized as follows. First, our empirical finding shows that stock returns Granger cause CDS spread changes for a larger number of firms than vice versa. Second, the sub-sample analysis reveals that while the stock market leads the CDS market in each sub-sample, the lead-lag relationship is more pronounced in the post-crisis period. Finally, our main findings remain the same even in the presence of controlling variables such as equity volatilities, absolute bid-ask spreads, and CDS premium on foreign exchange stabilization bonds issued by Korean government. In sum, consistent with the U. S. and U. K. evidence, it appears that the stock market leads the CDS market in Korea.

The weather largely affects economic activity, and thus, companies vulnerable to weather risk need to plan ahead to cope with unexpected weather changes, just as they do for changes in interest rates, oil prices, or foreign exchange rates to stabilize their earning stream. Weather derivatives can be a useful tool for weather risk management. This paper focuses on pricing one of the most popular weather derivatives -HDD/CDD options- and estimating the market price of weather risk (MPR). Historical data are used to construct the stochastic process of temperature, while the current market prices of Chicago and New York HDD futures options are used to extract the implied MPR. The Monte-Carlo Simulation Method is proposed to estimate the price of weather derivatives numerically. In addition, the approximate closed form formula for the options is provided modifying the Alaton, Djehiche, and Stillberg (2002) model. Finally, option price sensitivity to changes in MPR is analyzed to show the important role of the MPR in the weather option pricing model.

This study investigates compound basket options, which are options on portfolios of options. Although they may be new to financial markets, they are available as equity basket options, equity spread options, stocks of holding companies, and collateralized debt obligations. Using moments of portfolio values, we provide formulas for pricing compound basket options. According to numerical analysis, a lower bound and a weighted average of bounds yield relatively small errors. Additionally, ignoring the compound feature increases the pricing error of equity basket options because the feature captures the capital structure and leverage effect of stock prices.

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We observe that the incentive effects of traditional stock options can be improved by making the option's payoff concave in the region of a high stock price at maturity. To reflect the concave property, we propose two types of executive stock options: a generalized power option and an ordinary bull spread. Under the [Hall and Murphy (): American Economic Review 209‐214, Hall and Murphy () Journal of Accounting and Economics 33: 3‐42] framework, we show that the generalized power option with high concavity and the ordinary bull spread generate greater incentive effects than those of traditional options or the [Bernard, Boyle, and Chen (): The Journal of Derivatives 23: 9‐20] power executive options.

The author investigates realized comoments that overcome the drawback of conventional ones and derive the following findings. First, the author proves that (even generalized) geometric implied lower-order comoments yield neither geometric realized third comoment nor fourth moment. This is in contrast to previous studies that produce geometric realized third moment and arithmetic realized higher-order moments through lower-order implied moments. Second, arithmetic realized joint cumulants are obtained through complete Bell polynomials of lower-order joint cumulants. This study’s realized measures are unbiased estimators and they can, therefore, overcome the drawbacks of conventional realized measures.