This popular text, publishing Spring 1999 in its Second Edition, introduces the mathematics underlying the pricing of derivatives. The increase of interest in dynamic pricing models stems from their applicability to practical situations: with the freeing of exchange, interest rates, and capital controls, the market for derivative products has matured and pricing models have become more accurate. Professor Neftci's book answers the need for a...

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The interests and incentives of managers and shareholders conflict over such issues as the optimal size of the firm and the payment of cash to shareholders. These conflicts are especially severe in firms with large free cash flows--more cash than profitable investment opportunities. The theory developed here explains 1) the benefits of debt in reducing agency costs of free cash flows, 2) how debt can substitute for dividends, 3) why...

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A History of Interest Rates presents a very readable account of interest rate trends and lending practices over four millennia of economic history. Despite the paucity of data prior to the Industrial Revolution, authors Homer and Sylla provide a highly detailed analysis of money markets and borrowing practices in major economies. Underlying the analysis is their assertion that "the free market long-term rates of interest for any industrial...

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The calculation of equity value is typically characterized as a projection of future payoffs and a transformation of those payoffs into a present value (price). A good deal of research on pricing models has focused on the specification of risk for the reduction of the payoffs to present value but little attention has been given to the specification of payoffs. It is noncontroversial that equity price is based on future dividends to...

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This is the Annex to the paper "Speculation and financial fund activity: draft report, [TAD/CA/APM/WP(2010)8] prepared by Scott Irwin, University of Illinois and Dwight Sanders, University of Suoithern Illinois. It provides a detailed statistical and econometric analysis of the impacts of the participation of financial funds - index and swap - in agricultural commodity futures markets as well as for crude oil. The study includes new data and...

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For most of the last three millennia, the world’s commercial centers have used one or another variant of a gold standard. It should be one of the best understood of human institutions, but it’s not. It’s one of the worst understood, by both its advocates and detractors. Though it has been spurned by governments many times, this has never been due to a fault of gold to serve its duty, but because governments had other plans for their...

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- simple convenient representation of risks (one number) - measures downside risk (compared to variance which is impacted by high returns) - applicable to nonlinear instruments, such as options, with non-mymmetric (non-normal) loss distributions - may provide inadequate picture of risks: does not measure losses exceeding VaR (e.g., excluding or doubling of big losses in November 1987 may not impact VaR historical estimates)

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Banking on Basel: The Future of International Financial Regulation by Daniel K. Tarullo September 2008 • 256 pp. ISBN Paper 978-0-88132-423-5 The turmoil in financial markets that resulted from the 2007 subprime mortgage crisis in the United States indicates the need to dramatically transform regulation and supervision of financial institutions. Would these institutions have been sounder if the 2004 Revised Framework on International...

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Not too many years ago, then then Chairman of the U.S. House Banking Committee told me it was out of the question to require bank and savings and loans to mark their assets to market. Would anyone responsible for financial regulatory overdight have the temerity to be similarly dismissive today? I suspect the answer is yes. However, the increased attention formal, scientific appraisal of bank risks has received since then is gratifying to me...

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Asset securitization is helping to shape the future of traditional commercial banking. By using the securities markets to fund portions of the loan portfolio, banks can allocate capital more efficiently, access diverse and cost-effective funding sources, and better manage business risks. But securitization markets offer challenges as well as opportunity. Indeed, the successes of nonbank securitizers are forcing banks to adopt some of their...

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Asset pricing theory tries to understand the prices or values of claims to uncertain payments. A low price implies a high rate of return, so one can also think of the theory as explaining why some assets pay higher average returns than others. To value an asset, we have to account for the delay and for the risk of its payments. The effects of time are not too difficult to work out. However, corrections for risk are much more important...

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The aim of this book is to study three essential components of modern finance – Risk Management, Asset Management and Asset and Liability Management, as well as the links that bind them together. It is divided into five parts: Part I sets out the financial and regulatory contexts that explain the rapid development of these three areas during the last few years and shows the ways in which the Risk Management function has developed recently...

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