The Black-Scholes option pricing formula assumes that the variance of the return on the underlying stock is known with certainty. In practice an estimate of the variance, based on a sample of historical stock prices, is used. The estimation error in the variance induces error in the option price. Since the option price is a nonlinear function of the variance, an unbiased estimate of the variance does not produce an unbiased estimate of the option price. For reasonable parameter values, it is shown that the magnitude of the bias is not large.

This paper applies the technique for valuing compound options to the risky coupon, bond problem. A formula is derived which contains n-dimensional multivariate normal intecjrals. It is shown that, for some compound option problems, the special correlation structure allows an application of an integral reduction which may simplify the numerical evaluation. The effects of various indenture restrictions on the formula are discussed, and a new formula for evaluating subordinated debt is presented.

An equity-linked life insurance policy with an asset value guarantee (ELPAVG) is an insurance policy whose benefit payable on death or at maturity consists of the greater of some guaranteed amount and the value of a reference portfolio which is defined by the deemed investment of a predetermined component of the policy premium in a portfolio of common stocks or mutual fund–the reference fund. In an earlier paper we demonstrated that the benefit payable under an ELPAVG could be decomposed into the known guaranteed amount and an immediately exercisable call option to purchase the reference portfolio for an exercise price equal to the guaranteed amount. The principles of the option pricing model were then employed to derive the equilibrium premium for both a single premium ELPAVG contract and a periodic premium contract. It was further noted that the hedging arguments, which are the core of most of the recent theory of option pricing, could be employed to derive an investment strategy for the insurance company which would eliminate the risks associated with the sale of ELPAVGs: this is an important result, for ELPAVGs may pose a significant threat to the solvency of insurance companies since the risks of loss under different contracts are not independent, but are commonly related to the overall performance of the reference fund. Actuaries have responded to this threat by attempting to determine a level of reserves sufficient to reduce the probability of ruin to an acceptable level. On the other hand, adoption of the riskless investment strategy in theory eliminates the need to hold any reserves except against mortality risk.

The author argues, in this paper, that there are at least three reasons why a simultaneous equation bias may exist and be significant in single equation estimates of executive compensation when one of the independent variables is a measure of firm performance. First, there is simultaneity between the determination of the MRP of the executive input and profit maximizing output in the classical microeconomic sense. Second, where firm performance is used as a measure of executive quality, then a simultaneous bias may develop. Third, the presence of expense preference behavior could result in simultaneous but inverse effects on executive compensation and firm performance.

In recent financial literature a large volume of the articles dealt with asset leasing. This author and his colleagues [6] and others [7] developed the conditions under which asset leasing cannot increase the overall firm's value over normal debt leverage. Many others [2, 3, 11] analyzed the “lease-buy” decision using a variety of models and assumptions. None, however, considered the effect of asset leasing on the firm's capitalization rate. While asset leasing per se would not affect the firm's unlevered cost of capital, it should affect its estimation. This paper developed the adjustment factor to obtain the firm's corresponding unlevered cost of capital with leasing leverage. Basically, Modigliani and Miller's methodology [9] was adjusted for the different tax situation with asset leasing. The effective benefit of leasing on the firm's average cost of funds was shown to be not nearly as effective as an equivalent amount of ordinary debt.

The essence of short-term financial planning is to determine an asset and liability mix that minimizes the cost of financing the firm's cash surpluses and deficits over the planning horizon. Seasonal and other effects cause uncertainty in forecasted cash requirements, liquidation, and termination costs. We develop a stochastic linear programming model that is computationally feasible for a firm's financial planning over several periods with all three types of uncertainty when there is a rich structure over the set of possible asset choices. The models' solution is facilitated using a recent novel algorithm for finitely distributed simple recourse SLPR problems developed by Wets and coded by Collins, Kallberg and Kusy. The algorithm uses a “working basis” that has the same dimension as the corresponding (approximate) “mean” linear program.

In contrast with the normal undergraduate or graduate level course in international finance discussed by the other panelists in this session, the international financial material covered in the Masters in International Business Studies (MIBS) program at the University of South Carolina is not tightly collected into one segment, but rather is disaggregated and reintegrated into a larger curriculum design. In this degree program, designed specifically for the entry level training of personnel with aspirations for multinational responsibility, all business education (with the exception of a secondyear planning-policy course) is integrated into one large “megacourse,” the Unified Business Program. Within this megacourse, specific learning objectives have been developed and individual learning segments, many drawing on faculty and concepts from different disciplines, have been designed to meet these learning objectives. Material traditionally covered in an international finance course forms a portion of a number of these segments, and it is the purpose of this paper to outline how this material is integrated into the main flow of the program.

In a world where individuals are assumed to receive new information about an asset in random and sequential order, the volume of trading for a given message is a random variable. If the probabilities of trading events can be specified, it is possible to develop closed form expressions for the expected number of trades and the variance of trading. The result is a theory of trading which relates the number of trades to the characteristics of the message and to the number of participants in the market for an asset.

This study investigates the ability of daily technical indicators to predict the direction of change in the Standard and Poor's 500 Index (as measured by price relatives). Two sets of variables widely used by technical analysts are employed, and are designated “regular” variables and “percentage” variables. Examples of relevant “regular” variables are: volume; proportion of stocks advancing, declining, and remaining unchanged; off-lot purchases, sales, and short-sales; and new highs and new lows.

Historians of various “schools” have seen quite different things in the United States’ long years of business activity in China. The “realists” as Professor Hunt calls them, deny that significant business opportunities existed for Americans and point to obstacles that the Chinese put in the way of trade; the “Wisconsin school,” he says, emphasizes the public rhetoric of officials and businessmen who saw China as an outlet for capitalist surpluses. Citing three case histories — kerosene, cigarettes, and textiles — Professor Hunt shows that generalization is dangerous; that success depended more on businessmen's own skill, resources, and control of their domestic industry than on help derived from an imperialistically minded government.