No abstract

No abstract

In this study we examine how volatility and the futures risk premium affect trading demands for hedging and speculation in the S&P 500 Stock Index futures contracts. To ascertain if different volatility measures matter in affecting the result, we employ three volatility estimates. Our empirical results show a positive relation between volatility and open interest for both hedgers and speculators, suggesting that an increase in volatility motivates both hedgers and speculators to engage in more trading in futures markets. However, the influence of volatility on futures trading, especially for hedging, is statistically significant only when spot volatility is used. We also find that the demand to trade by speculators is more sensitive to changes in the futures risk premium than is the demand to trade by hedgers.

This study proposes a new design of reset options in which the option's exercise price adjusts gradually, based on the amount of time the underlying spent beyond prespecified reset levels. Relative to standard reset options, a step-reset design offers several desirable properties. First of all, it demands a lower option premium but preserves the same desirable reset attribute that appeals to market investors. Second, it overcomes the disturbing problem of delta jump as exhibited in standard reset option, and thus greatly reduces the difficulties in risk management for reset option sellers who hedge dynamically. Moreover, the step-reset feature makes the option more robust against short-term price movements of the underlying and removes the pressure of price manipulation often associated with standard reset options.To value this innovative option product, we develop a tree-based valuation algorithm in this study. Specifically, we parameterize the trinomial tree model to correctly account for the discrete nature of reset monitoring. The use of lattice model gives us the flexibility to price step-reset options with American exercise right. Finally, to accommodate the path-dependent exercise price, we introduce a state-to-state recursive pricing procedure to properly capture the path-dependent step-reset effect and enhance computational efficiency.

This study employs the heteroskedasticity‐robust variance ratio test and the modified rescaled range analysis to examine the short‐term and long‐term behavior of foreign exchange rates. The empirical results suggest that four of the five weekly nominal exchange rates examined exhibit short‐term dependence. Further, there is evidence of long‐term dependence in the nominal exchange rate series. The results also indicate that the real exchange rates generally exhibit short‐term independence, and the lack of strong evidence in favor of long‐term dependence in real exchange rates indicates that the purchasing power parity may not hold in the long run.