This paper values American options on foreign assets in a stochastic interest rate economy using a two-point Geske and Johnson (1984) technique. The method requires the valuation of just two options: a European option and a twice-exercisable option. I first derive the risk-neutral distributions of asset prices under two forward risk-adjusted measures. Closed form solutions for European options on foreign assets are then obtained by applying these risk-neutral distributions. This article also provides analytic solutions for pricing twice exercisable options that are at most two-dimensional even though the valuation problem involves four risk factors at two exercise dates. I report the results of numerical evaluations of American option values using my method and show how they vary with the interest rate parameters. I also verify the accuracy of the proposed method by comparing with the benchmark values obtained from the least-square method of Longstaff and Schwartz (2001).

This study investigates the relation between the method of payment in acquisitions, earnings management, and operating performance for a large sample of firms that conducted acquisitions between 1985 and 1997. Prior to their acquisitions, acquirers exhibit levels of operating performance that exceed that of their respective industry peers. We find no evidence that acquirers manage their earnings prior to acquisitions, despite the possible incentives of managers who plan stock-based acquisitions to temporarily inflate their stock's purchasing power. Subsequent to acquisitions, acquirers continue to exhibit superior performance relative to their industry and experience significantly higher levels of operating performance than control firms with similar pre-event operating performance. Although the extant literature documents significant relations between the form of acquisition payment, announcement returns, and the post-acquisition excess return of acquirers, we find no evidence that the method of payment conveys information about the acquirer's future operating performance.

We propose a methodology for assessing model risk and apply it to the implied volatility function (IVF) model. This is a popular model among traders for valuing exotic options. Our research is different from other tests of the IVF model in that we reflect the traders' practice of using the model for the relative pricing of exotic and plain vanilla options at one point in time. We find little evidence of model risk when the IVF model is used to price and hedge compound options. However, there is significant model risk when it is used to price and hedge some barrier options.

We investigate the relative importance of various factors in explaining the volatility skew observed in the prices of stock options traded on the Chicago Board Options Exchange. The skewness of the risk-neutral density implied by individual stock option prices tends to be more negative for stocks that have larger betas, suggesting that market risk is important in pricing individual stock options. Also, implied skewness tends to be more negative in periods of high market volatility, and when the risk-neutral density for index options is more negatively skewed. Other firm-specific factors, including firm size and trading volume a so help explain cross-sectional variation in skewness. However, we find no robust relationship between skewness and the firm's leverage. Nor do we find evidence that skewness is related to the put/call ratio, which may be viewed as a proxy for trading pressure or market sentiment. Overall, firm-specific factors seem to be more important than systematic factors in explaining the variation in the skew for individual firms.

This study shows that international firms listing their shares on the New York Stock Exchange (NYSE) or the London Stock Exchange (LSE) experience a significant increase in visibility, as proxied by analyst coverage and print media attention (The Wall Street Journal or Financial Times). The increase in analyst following is also associated with a decrease in the cost of equity capital after the listing event in a way consistent with Merton's (1987) investor recognition hypothesis. Our results are stronger for NYSE listing firms than for LSE listing firms. This may partially compensate firms for the higher costs associated with NYSE listing (compared to LSE listing).

This study examines call option values implicit in U.S. corporate bonds from 1973 to 1994. The average call option value is 2.25% of par. Over time, call values remain close to zero until one year before the first call date, reach a maximum at the beginning of the callable period, and slowly decrease thereafter. The determinants of call values are examined. The results show that bonds of firms that have called aggressively in the past have larger call values. Additionally, lower interest rates, smaller slopes of the yield curve, and higher interest rate volatility lead to larger call values. The results also show that call values increase with time to maturity in the callable period but decrease with time to maturity in the call protection period. Lower rated, higher coupon bonds have larger call values. There is no evidence that the length of the call protection period affects call values.

The Financial Institutions Reform, Recovery, and Enforcement Act of 1989 limited thrift goodwill that could be counted as regulatory capital. This paper infers the significance of the thrift put option value from the relationship between thrift goodwill and stock returns. The ability to count goodwill as regulatory capital might have resulted in large put option values by allowing many thrifts to hold low capital and risky assets before the legislation. Tightened regulation may have reduced put option values and hence the wealth of thrift shareholders. Goodwill had a large negative effect on stock returns of low capital thrifts in 1989 and the negative effect persisted in the following two years. These findings suggest that many thrifts had large put option values before the FIRREA and the elimination of put option values was largely responsible for the stock price decline.

Stock flippers pose a problem for underwriters of initial public offerings (IPOs). They subscribe to the issue, but immediately resell their shares, which may depress the aftermarket price. This paper presents a model of how stock flippers affect IPO pricing. The model shows that the underwriter chooses whether to price the issue as a cold, weak, or hot IPO. Stock flippers have the greatest effect on pricing in weak IPOs and provide an explanation for underwriter stabilization. In contrast to existing models of stabilization, the underwriter gains from after-market purchases, particularly if the contract with the issuer includes an over-allotment option. The over-allotment option encourages a lower offer price, which may lead to under-pricing. These results correspond to recent findings on IPO returns and underwriter stabilization activities.

Recovering an Asset's Implied PDF from Option Prices: An Application to Crude Oil During the Gulf Crisis William R. Melick and Charles P. Thomas Journal of Financial and Quantitative Analysis Vol. 32, 1997, pp. 91-115